A Dollar Crisis in the Making

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41

Matt,
Just wanted to make it clear that not all the debt has to be refinanced every year. 

I am not disputing that we face a huge deficit and an already huge debt.  As for the inability for the level of savings to finance the current deficit, I would be curious to know your thoughts/opinions on the following piece by Albert Edwards (w/ Societe General).  You will find he makes the case that banks can and will allocate their reserves to Treasuries, and remove them from corporate debt.  I wonder if they have enough reserves to do that.  Anyway, here is the piece:

http://www.scribd.com/doc/19368407/Prepare-for-Deflation

42

Farmer;
I’m not saying that all debt has to be refinanced each year. But the cost of the debt, not just the cost of the deficit, must be paid for by someone on a continual basis.

To only focus on the deficit is like the father of the family celebrating his new-found financial independence after paying of the loan on a small car while ignoring that he has two other car loans and a home mortgage, the costs of which depend on the kindness of those who finance it. But unlike a mortgage or carloan, the cost of US debt is not locked in with a multi-year (usually) maturity date. An increasing amount of this debt is financed by shorter-term instruments which means they must be refinanced more often.

Pettis is focused on the shrinking chimanzee (falling current account deficit) while ignoring the the rapidly growing 800-pound gorilla (total debt and future liabilities) in the room.

As for Edwards piece, it is very interesting but he gives much more weighting to official government CPI, PCE and GDP figures than is prudent in my opinion. These numbers are really not reliable from my perspective. We are not in deflation right now, real inflation is expanding at somewhere between 4-6 percent annually according the John Williams’ CPI-ALT estimate which calculates CPI as it was before all the changes post 1982. That rate is falling rapidly and we could enter deflation at some point but we are certainly not there yet. 

My concern that in real terms, T Bond investors lost more than 9% in the last year. T-bonds investors lost an average 4.5% plus real CPI of 5.4% according to Williams giving  a total real loss of 9.4%. I don’t care whether you are a foreigner or domestic investor but once investors realize how they are really doing in their T-bill investments, they’ll run for the hills. This I think goes a long way in explaining the decline in Treasury international capital flows and concerns for the safety of the dollar in the future. 

Total credit market debt has doubled in nominal terms since 2000. Let’s assume for a moment (even though I don’t think its true) that the US could finance all its debt needs domestically today, unless debt starts dropping (something that has not occurred since 1981), it is only a matter of time before the debt becomes too big to finance at home and then before it becomes too big to finance globally… 

Saying that we don’t need foreigners to finance our debt a) ignores the total debt picture b) ignores the need for all investors to earn a profit no matter where they are and c) assumes that money will magically materialize out of thin-air and is therefore economically stupid.  

I am amazed at the amount of self-delusional analyses (like the Pettis piece) that take disparate statistics to make a case. From a real big picture situation, the US has had a fiat currency since 1971 by definition. A 2008 book by Ralph Foster (Fiat Paper Money: The history and evolution of our currency) does an excellent job of examining the history of fiscal paper money occurrences in history and here is how I summed up the fiat currency life cycle in an article recently.

Without exception, every fiat paper currency since the beginning of time has suffered a strikingly similar fate. As we mentioned last month, the U.S. dollar became a fiat paper currency backed by nothing more than the faith and good will of the government following the move by Richard Nixon to take the nation off the gold standard in 1971. 

Fiat paper money is currency not backed by gold, silver or other semi-precious metal. Its first recorded use provides valuable insight into the challenges nations employing it have faced throughout history.  

According to Foster, fiat currency for general use first appeared in recorded history in the 11th century AD in Szechwan, China. Following a long period of peace and prosperity, the area around Szechwan suffered a shortage of copper which was used for coinage. Iron was tried but it proved too heavy and impractical.   Paper had been used in money shops in the exchange of deposit receipts to transact business so the next logical step was to use it as a currency. In 1024 it made its debut as a national currency for general use by the Sung Empire. 

Armed with the best of intentions, bureaucrats for the imperial Sung treasury intended the currency to be redeemed for coin after three years. However, whenever there is potential for abuse the temptation becomes unbearable and over time, the Sung treasury kept printing an increasing number of notes and redeeming fewer at the allotted time. By 1077, only 29 percent of the issue was backed by coin. 

But in spite of these abuses, the note called the chiao-tzu held its value for seven decades. As time went on, the treasury gradually and quietly slipped into the practice of issuing series after series of notes with little regard for the regulatory controls. The days of 29 percent backing quietly slipped into oblivion as the state discovered how easy it was to pay its obligations in paper (sound familiar yet?). By the first decade of the 12th century, over 20 times as many notes were circulating as had been originally authorized in 1024 and prices were quickly rising. Then the Sung Empire was attacked and war began, further increasing the need for money by the rulers. Laws were enacted to contain inflation but it was too late. In 1127, the leaders of the Sung Empire ceded the territory in dispute and fled south by which time the chiao-tzu had become worthless.  

This set of events with different casts played out four more times over the next two centuries in China and then countless times in other parts of the world over the next nine hundred years in just about every civilized nation in the world. And although the characters and locations changed, the plot remained strikingly similar that like a Shakespearian tragedy, could be broken down into five all-too predictable acts.  

Act 1 – A form of currency, usually a metal, which had been in use, became impractical as the economy grew causing bureaucrats to adopt a paper replacement due to its light weight, ease of use and versatility. Often but not always, the new note was initially backed either by gold, silver or copper and would often have a redemption date. 

Act 2 – As time progressed and prosperity grew, the temptation to create something from nothing was too great to resist and an increasing number of notes would be printed by those in charge of the treasury. This would not be immediately noticeable which led to an increasing number of notes being printed to the benefit of those in charge. Generally the ruling classes enjoyed new found prosperity, wealth and status. It was generally at this stage of the fiat currency life cycle that Ponzi schemes like Tulip Mania (1637) in the Netherlands or the South Sea Company bubble (1720) took root. Without the availability of large amounts of ready and portable cash, such schemes and bubbles are nearly impossible. 

Act 3 – Often a war, attack, military action or other crisis then erupted that required huge sums of money from the ruling classes. Debt replaced greed as the primary motivator to print more money. Any checks and balances still in place to curtail money supply would be abandoned and the printing presses were kicked into high gear. Debt continued to mount as inflation began in earnest.   

Act 4 – The result was always the same – hyperinflation ensued after attempts to pay off unmanageable levels of debt failed and the currency plunged in value until it became worthless. The unfortunate aftermath in nearly every case was all-too predictable.

Act 5 – In the wake of financial collapse which was often but not always the result of a failed expensive military campaign or war which the subject country usually lost, economic collapse gripped the nation and economic chaos followed. Citizens stripped of their property struggled to feed themselves and their families. Barter became the primary form of currency. Often laws would be passed banning the use of paper currency again. But in a generation these lessons were forgotten laying the foundation for the next fiat currency cycle.  

Foster’s Fiat Paper Money is an essential read for anyone concerned about their future financial well-being. In the appendix, Foster lists the instances he found in which national notes became worthless, breaking the list into decades starting from the beginning of the 20th century.   

In total, there are an incredible 431 examples (pages 216 and 217) in which a national note or currency became worthless between 1900 and 2009 which works out to an average of four fiat money collapses per year. And a number of nations have been repeat offenders.

Foster also discusses four interesting examples of fiat paper money in the U.S. since our nation’s beginnings (not including the current dollar) that like every other case of every fiat currency in history, eventually became worthless and had to be taken out of circulation.   

So as you see, debt is only one of the horsemen in this tragedy but it is one that eventually brings the house of cards down. The big unknown is when…

Matt Blackman

Host www.TradeSystemGuru.com

43

The analysis on China’s treasury purchases is not correct. China continues to be the most important purchaser of US treasuries. 
China’s purchases have been understated recently (while others have been overstated), despite the initial Treasury report. International money flow experts (such as Brad Setser) have noted in the past that middle eastern (Oil Exporters) and certain countries in Asia (most notably China) funnel some of their purchases through the London subsidiaries of US primary dealers. So, with respect to the Treasury data, these purchases are reported as UK purchases. This has happened several times in the past with the numbers revised at a later time. This explains the most recent significant jump in treasury purchases (according to TIC) by the UK.

These numbers are revised once the annual survey is published.

Brian

 

44

Gonegolfin:  Thanks for the really good info.  Do you have any idea WHY some purchasers funnel things through London?  Is it just because it’s a major financial center and that happens to be easier for some reason or other, OR is this a deliberate choice of some sort, whereby they are sending the money there for this very reason, and that helps the purchasers some how?  

45

I have my theories … which are in concert with some other folks I respect and converse with on occasion.
First, I think that time zone plays somewhat of a role and because it is a major financial center.

Second, and more controversially, this allows the Chinese to hide some of their own currency intervention (at least for a period of time) … necessary to keep the Yuan from strengthening against the Dollar. IOW, it would be less noticeable if the US treasury purchases attributed to the Chinese were lower.

There are other tricks that the Chinese use to disguise their currency intervention. But that is another topic.

Brian

 

 

46

Brian,
based on your patterns here I see that you have a strong need to be seen and heard.  However, I wish you would first read my postings before complaining about them being innaccurate or incomplete. 

Where you wrote “International money flow experts (such as Brad Setser) have noted in the past that middle eastern (Oil Exporters) and certain countries in Asia (most notably China) funnel some of their purchases through the London subsidiaries of US primary dealers. So, with respect to the Treasury data, these purchases are reported as UK purchases.”

I wrote:

While part of the answer lies with the fact that the UK banking center often operates as a pass-through for other entities (like Saudi Arabia, for example), it could also be operating on the behalf of other official parties.

This is not the first time you have utterly misread one of my posts, failed to understand it, and attempted to drag down my name.  Frankly, I am quite tired of it.

Second, if you are going to make the claim that you have better data than the Treasury Department (“China continues to be the most important purchaser of US treasuries”) you really need to back that up with some, you know, data.  We don’t trade in egos and heresay around here.  neither are helpful to furthering our understanding.

If you find these bars a bit too high, then perhaps this is not the right spot for you.

47

[quote=mblackman]
To only focus on the deficit is like the father of the family celebrating his new-found financial independence after paying of the loan on a small car while ignoring that he has two other car loans and a home mortgage, the costs of which depend on the kindness of those who finance it. But unlike a mortgage or carloan, the cost of US debt is not locked in with a multi-year (usually) maturity date. An increasing amount of this debt is financed by shorter-term instruments which means they must be refinanced more often.

Pettis is focused on the shrinking chimanzee (falling current account deficit) while ignoring the the rapidly growing 800-pound gorilla (total debt and future liabilities) in the room.

As for Edwards piece, it is very interesting but he gives much more weighting to official government CPI, PCE and GDP figures than is prudent in my opinion. These numbers are really not reliable from my perspective. We are not in deflation right now, real inflation is expanding at somewhere between 4-6 percent annually according the John Williams’ CPI-ALT estimate which calculates CPI as it was before all the changes post 1982. That rate is falling rapidly and we could enter deflation at some point but we are certainly not there yet. 

My concern that in real terms, T Bond investors lost more than 9% in the last year. T-bonds investors lost an average 4.5% plus real CPI of 5.4% according to Williams giving  a total real loss of 9.4%. I don’t care whether you are a foreigner or domestic investor but once investors realize how they are really doing in their T-bill investments, they’ll run for the hills. This I think goes a long way in explaining the decline in Treasury international capital flows and concerns for the safety of the dollar in the future. 

Total credit market debt has doubled in nominal terms since 2000. Let’s assume for a moment (even though I don’t think its true) that the US could finance all its debt needs domestically today, unless debt starts dropping (something that has not occurred since 1981), it is only a matter of time before the debt becomes too big to finance at home and then before it becomes too big to finance globally… 

Saying that we don’t need foreigners to finance our debt a) ignores the total debt picture b) ignores the need for all investors to earn a profit no matter where they are and c) assumes that money will magically materialize out of thin-air and is therefore economically stupid.  

I am amazed at the amount of self-delusional analyses (like the Pettis piece) that take disparate statistics to make a case. From a real big picture situation, the US has had a fiat currency since 1971 by definition. A 2008 book by Ralph Foster (Fiat Paper Money: The history and evolution of our currency) does an excellent job of examining the history of fiscal paper money occurrences in history and here is how I summed up the fiat currency life cycle in an article recently.

Without exception, every fiat paper currency since the beginning of time has suffered a strikingly similar fate. As we mentioned last month, the U.S. dollar became a fiat paper currency backed by nothing more than the faith and good will of the government following the move by Richard Nixon to take the nation off the gold standard in 1971. 

Fiat paper money is currency not backed by gold, silver or other semi-precious metal. Its first recorded use provides valuable insight into the challenges nations employing it have faced throughout history.  

According to Foster, fiat currency for general use first appeared in recorded history in the 11th century AD in Szechwan, China. Following a long period of peace and prosperity, the area around Szechwan suffered a shortage of copper which was used for coinage. Iron was tried but it proved too heavy and impractical.   Paper had been used in money shops in the exchange of deposit receipts to transact business so the next logical step was to use it as a currency. In 1024 it made its debut as a national currency for general use by the Sung Empire. 

Armed with the best of intentions, bureaucrats for the imperial Sung treasury intended the currency to be redeemed for coin after three years. However, whenever there is potential for abuse the temptation becomes unbearable and over time, the Sung treasury kept printing an increasing number of notes and redeeming fewer at the allotted time. By 1077, only 29 percent of the issue was backed by coin. 

But in spite of these abuses, the note called the chiao-tzu held its value for seven decades. As time went on, the treasury gradually and quietly slipped into the practice of issuing series after series of notes with little regard for the regulatory controls. The days of 29 percent backing quietly slipped into oblivion as the state discovered how easy it was to pay its obligations in paper (sound familiar yet?). By the first decade of the 12th century, over 20 times as many notes were circulating as had been originally authorized in 1024 and prices were quickly rising. Then the Sung Empire was attacked and war began, further increasing the need for money by the rulers. Laws were enacted to contain inflation but it was too late. In 1127, the leaders of the Sung Empire ceded the territory in dispute and fled south by which time the chiao-tzu had become worthless.  

This set of events with different casts played out four more times over the next two centuries in China and then countless times in other parts of the world over the next nine hundred years in just about every civilized nation in the world. And although the characters and locations changed, the plot remained strikingly similar that like a Shakespearian tragedy, could be broken down into five all-too predictable acts.  

Act 1 – A form of currency, usually a metal, which had been in use, became impractical as the economy grew causing bureaucrats to adopt a paper replacement due to its light weight, ease of use and versatility. Often but not always, the new note was initially backed either by gold, silver or copper and would often have a redemption date. 

Act 2 – As time progressed and prosperity grew, the temptation to create something from nothing was too great to resist and an increasing number of notes would be printed by those in charge of the treasury. This would not be immediately noticeable which led to an increasing number of notes being printed to the benefit of those in charge. Generally the ruling classes enjoyed new found prosperity, wealth and status. It was generally at this stage of the fiat currency life cycle that Ponzi schemes like Tulip Mania (1637) in the Netherlands or the South Sea Company bubble (1720) took root. Without the availability of large amounts of ready and portable cash, such schemes and bubbles are nearly impossible. 

Act 3 – Often a war, attack, military action or other crisis then erupted that required huge sums of money from the ruling classes. Debt replaced greed as the primary motivator to print more money. Any checks and balances still in place to curtail money supply would be abandoned and the printing presses were kicked into high gear. Debt continued to mount as inflation began in earnest.   

Act 4 – The result was always the same – hyperinflation ensued after attempts to pay off unmanageable levels of debt failed and the currency plunged in value until it became worthless. The unfortunate aftermath in nearly every case was all-too predictable.

Act 5 – In the wake of financial collapse which was often but not always the result of a failed expensive military campaign or war which the subject country usually lost, economic collapse gripped the nation and economic chaos followed. Citizens stripped of their property struggled to feed themselves and their families. Barter became the primary form of currency. Often laws would be passed banning the use of paper currency again. But in a generation these lessons were forgotten laying the foundation for the next fiat currency cycle.  

Foster’s Fiat Paper Money is an essential read for anyone concerned about their future financial well-being. In the appendix, Foster lists the instances he found in which national notes became worthless, breaking the list into decades starting from the beginning of the 20th century.   

In total, there are an incredible 431 examples (pages 216 and 217) in which a national note or currency became worthless between 1900 and 2009 which works out to an average of four fiat money collapses per year. And a number of nations have been repeat offenders.

Foster also discusses four interesting examples of fiat paper money in the U.S. since our nation’s beginnings (not including the current dollar) that like every other case of every fiat currency in history, eventually became worthless and had to be taken out of circulation.   

So as you see, debt is only one of the horsemen in this tragedy but it is one that eventually brings the house of cards down. The big unknown is when…

 

 

[/quote] a good read.

48

mblackman -
Don’t forget that fiat currencies also have many great success stories.  For example, the tally stick system in England ran well for around 600 years.  When the private bank of England set up shop, within 75 years 75% of the budget was going to service the new debt.

BTW, the gold standard failed in 1933, in the U.S., and it failed a few years earlier in Great Britain.  In fact it failed everywhere it was applied through-out Europe.

Look at the debt numbers CM is showing, imagine if we had to pay the interest with gold.

Larry

49

Chris,

#1 I did not complain. I merely made a point.

#2 I did not misread your post nor did I fail to understand it. As a principal point in your post you speculate that the Fed is reticient to be audited because of what an audit might show concerning the uptick in reported purchases of US treasuries.

“As an aside, one reason that I suspect the Federal Reserve is reticent to be audited concerns the UK purchases of Treasury bonds.” 

You say that part of the answer “may lie with the fact that the UK banking center often operates as a pass-through for other entities (like Saudi Arabia, for example)”. But you also make no mention of China or Japan funneling purchases (which is key to this topic). I wanted to make it clear that China and Japan do funnel purchases through the UK and historically have been the reason for inflated UK numbers in the TIC report, but are then adjusted when the annual survey arrives. But you also speculate that the UK banking center could be operating on behalf of the Fed (“it could also be operating on the behalf of other official parties. Like the Federal Reserve, perhaps?”). There is nothing at all to support this.

This speculation and the Treasury data you used is what I was challenging. I was not doing it in a mean spirited manner. I am sorry if you took it that way.

#3 The other time I corrected something in your post was in your 8/6 article. I did not misread and my corrections were sound. If you disagree and wish to debate those points, please do. But you did not and thus I assume you accepted them or simply did not want to respond. I am fine with that. BTW, I do think your “The Shell Game” article has some problems in it (which I did not post to your blog). I would be glad to discuss if you like. But I get the sense you are not interested. Also, if you do not want me to post on your blog, I will refrain from doing so.

Unfortunately, the Treasury data has some problems with it. Measuring international data flows is a very difficult thing. There are some very good economists that do only that. One of them is Brad Setser. Yes, there is better research available than entirely relying on the Treasury data. This very topic has been studied for some time and is accepted work. I suggest you take a look at Setser’s bog and utilize the search function liberally. There is some really good work there.

He also has an excellent research paper that studies China’s money flows. You can find it here … http://www.cfr.org/content/publications/attachments/CGS_WorkingPaper_6_China_update0509.pdf. I would start with this, particularly beginning with page 10.

BTW, I really liked your FDIC article.

I hope you have a good Labor Day weekend and opening college football weekend.

Brian

 

 

 

 

50

Brian,
your attempts at revisionism are disturbing.  You absolutely mis-read my 8/6 post and I counted over 10 separate sites where you not only went to great lengths to point out that you had broken  the story of the Fed buying on the run recent Treasuries but went on to state, without any further evidence or backing, that my article “was full of inaccuracies.”  This was extremely bad form for two reasons.

  1. You utterly misread sarcasm in my post for realism and ran off with the wrong impression that I do not know how the Fed/Treasury auction process works, and:
  2. You did not break the story about the 7-year treasury CUSIPs that I was pointing out specifically in the context of the failed 5-year auction the day prior, which was the whole point of that article.  I did.  You had pointed out some earlier ones of which I was completely unaware, as I would have certainly referenced your work had I been aware of it.  But you openly hinted in several comment areas on various blogs that I read that you thought of my article as a form of theft of yours.  Everybody here can vouch that I am the absolute king of providing links back to source work and attributing ideas to where they properly belong.  So let's be clear, you did not write any articles about the 7-year auctions prior to mine, but that did not prevent you from energetically spreading a very different version of the story all across the web.  I considered that extremely bad form and I've not forgotten it (and wonder why you choose to participate here at all if you think my work steals from yours and is full of errors?). 
Now, if I wasn't so busy trying to write articles, research and run a  thriving website I would have gone out to all these various places where you had sown your ill-seeds and inaccuracies to feed your ego, but I regrettably did not have the time. Nor the energy.  

You have a perverse style of engagement, not terribly constructive to be honest, and I find it to be a real strain to argue with on-the-spot revisionists.  There are fresh examples are right there in your “counter post” and I only will spend time here on them so that others might draw some lessons.

One:  I clearly indicated that I was engaging in “rank speculation” (my exact words) in regards to the source of the UK funds while you argumentatively stated your case as ‘fact’; “The analysis on China’s treasury purchases is not correct. China continues to be the most important purchaser of US treasuries.”  

Do you appreciate the difference?  I clearly label my opinions as such where you state yours as fact.  Further, where is your evidence?  Being a constructive member of this community means that you provide the facts to back up your case, you do not drop in links to 26 page working papers with vague claims that the data to make your case might, or might not, be in there. 

Two: 

If you are going to boldly claim that my “analysis on China’s Treasury purchases is not correct” then exactly how is it not correct, where, and what’s the data to reveal the “correct” view?   Frankly I seriously question anybody who would claim to have “the correct view” besides the Chinese and they aren’t telling.  I’ve already challenged you on this once and your entire response, lengthy though it was, consisted of hinting that you have additional problems with other parts of my work but, once again, opting for innuendo over proof or data.  If you were operating a website I would never dream of opening up a comment on it saying “The analysis on China’s treasury purchases is not correct” because it would have been bad form and because it would never occur to me to think I was the possessor of the correct view.  When it comes to China, the honest view is that we’re all speculating to some degree.

But, alas, you are probably correct in assuming that I do not have an interest in debating you about your issues with my work as I suspect, based on your response here, that it would be a wasted effort on my part.  Your interests seem not to lie in illuminating the larger situation, just yourself.

For the record, I am deeply committed to figuring things out, will readily admit when I am wrong, and know that I do not know everything.  Nobody does.  Things are developing at an incredible pace, I am learning as fast as I can modifying ideas and beliefs on the fly, and I really only have energy for illuminating the path ahead.

If you are game for that, then grab an extra slice of humble pie and hop on board, I’d be most pleased if you did.  If not, then this is not the right place.

P.S. Brad Setser writes for the CFR and, as such, is writing for a powerful political organization famous for delivering scripted analyses that support various policy initiatives.  I tend to discount all CFR-sponsored work as I am never sure which is real and which is spin.  He might be truth itself, but how would I know?  I consider him a source, like many others, but not a trusted source.

51

Our public servants in Washington DC are not going to fire themselves.  They will ride this wave until it collides with reality.  The lies needed to financially support this sorry tale will grow in size and complexity until the bubble pops. 
The potential exists of a mob of unemployed without a social safety net combined with a substantial inability to import the oil that drives everything and feeds us all.  We truly could face mass starvation sooner than most think possible.

52

[quote=cmartenson]

  1. You did not break the story about the 7-year treasury CUSIPs that I was pointing out specifically in the context of the failed 5-year auction the day prior, which was the whole point of that article.  I did.  You had pointed out some earlier ones of which I was completely unaware, as I would have certainly referenced your work had I been aware of it.   [/quote]
One more try ...

Evidently this is not about the post on this thread … but earlier posts. I broke the story of the Fed buying on the run recent Treasuries and provided examples. What you are citing above is simply a specific example of this principle point that had already been made. Similar to the specific example I provided in my 8/4 article …

“With the 7-year debt auction on Thursday 7/30 being $28 billion, the Fed gave the market a nice head start soaking a substantial supply of longer term debt and specifically treasuries in the seven year maturity range. What is also clear is that the primary dealers purchasing the securities at auction are not holding these securities long before the Fed comes to the rescue. Let’s take the 7-year 3.25% coupon Treasury Notes auctioned by the Treasury on 6/25/09 as an example. $2.722 billion of this particular issue (CUSIP 912828KZ2) was purchased by the Fed on the day of issuance (6/30/09), with an additional $3.785 billion a mere three weeks later on 7/21/09. This is not atypical as there are many examples where the Fed executed large purchases of securities in close proximity to the actual auction of those securities . On the Fed calendar this week is the purchase of some longer dated treasury securities (Wednesday and Thursday), including some with maturities of seven to ten years. I would venture to say that a sizeable stake of these securities were auctioned by the Treasury in the last couple of months, maybe even last Thursday. It makes you wonder if the Fed is not encouraging primary dealer participation in these auctions by making it abundantly clear that the Fed will absorb a sizeable portion of their inventory quickly, while still assuring dealer profits. This is about as close as it gets to the Fed lending directly to the Treasury, without actually doing it.”

The news here (the breaking story) was the Fed buying on the run treasuries.

[quote=cmartenson]

  1.  But you openly hinted in several comment areas on various blogs that I read that you thought of my article as a form of theft of yours.  [/quote]
I was not accusing you of theft. I was bringing to light that I had previously broken the story concerning the Fed buying specific treasuries that were recently auctioned and issued.  I was simply looking for due credit for the work that I did. I would have appreciated an acknowledgement after you saw my story. But you did not reply on that thread. You did not reply until now.

I have no interest in conducting a conversation that has such a belligerant tone. So this is my last post unless you want to engage in a productive manner. I think you would find we have a fair amount in common, though we might disagree on some things as well. Either way, I wish you well.

Brian

53

Although Australia is regarded as a debtor nation so indebted it should be suffering from its own currency crisis. However, the AUD has gained impressive ground in the past 6 months.
AUD/USD has gone up to 0.85 from the February low of 0.65. That means the Australians are buying more from the US with the same amount of AUD. I wonder this currency crisis will someday permeate thru to other debtor nations like Australia.

 

54

Hugh Hendry Eclectica August Commentary
AUDUSD,

I recommend the article above posted by JAG in yetserday’s DD.  Look at the last section especially.

55

Thank you for your link. That article has made a reference to Dr Steve Keen who believes that the impact by private debts contractions could hamper the authorities remedies. I think Dr Keen’s model has not taken into account the proportion of risk-free private debts. E.g., some of the housing loans borrowed by overseas students are guaranteed by their wealthy parents who would bring in millions in cash once their son or daughter gained a foothold in Australia. This kind of housing mortgages are potentially very positive in balancing the budget, but I’m not sure of its weight in the overall financial situation.

56

In your blog on Dollar Criss in the Making you show a graph wher the UK is the largest new holder of US debt. Could there be an agreement between 2 allies to hold each others debt? since Japan and China are reducing the holding of US debt? A sort of a Ponzi scheme? I do not understand the workings of the Fed and UK Cenrtral Bank but could there be a lop hole where by both Goverments can increase money supply by issuing debt to each other? how and when would such a scheme collapse?
 

 

57

I agree. Nobody knows how long the dollar will be able to sustain itself. but if there’s one thing that is clear to me is that it is not as much of a safe investment anymore. This rise could be temporary as we’re trying really hard, doing everything possible to shift the economy where we might get more confidant but only time can tell which side we fall on. The trend certainly makes me predict that if this is all pused by FED, we will start seeing a decline as the rest of the world will stop investing.

58

There is mounting evidence that China’s central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.

Dollars to Pounds