Monday, June 8, 2009

DEEP, Liquid and trusted US Treasury markets until...

Today on Bloomberg, reporter Steven Engle reported that Robert Zoellick, World Bank, said that China's move away from its concentrated dollar holdings is unlikely to occur very soon BECAUSE of the "Deep, trusted and liquid US Treasury market"- I like to be hopeful, optimistic and wave the flag too but for different reasons; Flag day is coming up on June 14.

Deep, trusted and liquid means full faith and credit. Full faith and credit means unlimited taxing authority. Taxpayers brace for a huge load - coming down on our backs - stand up and be the face of deep, liquid and trusted so that we can show the rest of the world we are responsible for paying down / off the debt.

When we have conquered this Everest - size pile of debt - catch your breath real quick; no problem because we will be fully fit to man handle the tiny burdens of what? The tax increases necessary to pay for Social Security and universal healthcare - estimated to be over $30 to 40 trillion. Good thing it does not come due all at once. Because when we've have tackled those behemoths someone with a memory will remind us that there are not chump change, to-be-funded promises made in corporate pensions and municipal contracts.

And a couple of minor realities: Even a fifth grader can do the math as long as she has accurate numbers to begin with; (is it any wonder why our kids grow up to be confused about the multiple sets of books that abound?)
US Inflation, therefore interest rates are unlikely to go down.
With more debt and increasingly higher interest upon both the interest and debt outstanding, MORE, not fewer questions, challenges will arise due to the realities facing the dollar.
Market demand for Treasuries, from all sources, net looks to trend down over time.

The inevitable - when not if conclusion for US Dollar denominated anything.
And the always "home court advantage" attendant to financial accounting rules, asset valuation rules, official statistics, though represented as "full disclosure" is somewhere south of "full" - such that everything the rest of the world receives in payment is coined in US dollars - and has regrettably been hastened by the actions of past and current US Treasury / Fed / NY Fed / Wall St / AIG / Counterparties. Especially the proprietary trading, few too big to fail aka too big to exist - thanks to Chairman Volker for that one.

Note to policy makers when it comes to traditional bank loans 10x leverage for the bank is traditional; to suggest that 25 x leverage (or only 4% of assets to debt for financial trading assets - you're kidding right?) Allowing that kind of leverage for anything - is SPECULATION. REPEAT SPECULATION. And repeats what's already been encored by the too big to fail - LONG TERM CAPITAL MANAGEMENT circa 1998. Recall what leverage, derivatives and off balance sheet encourages / causes? Everything is created, traded and valued where? IN DARKNESS.

Is there even one?
Is there even one prudent advisor who is pounding the table demanding maximum exposure to as many US dollar denominated assets as possible? Show me. And especially show me if I am incorrect or unsound.

This will make for interesting not here to fore seen bed mates er investors / creditors including Canada, China, India, Japan, the OPEC countries, the rest of Latin and South America and Europe versus the Dollar. What to do about the all these new Dollars floating around?

Better start the PR spin and minting those new Martian Intergalactic Oxygen and Water-backed Bonds; soon we may all need a drink and breath of fresh air.

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