It is the task of today’s Weekend Markets and Money to coin a new name for US Treasuries, aka US government debt. We’re going to call them Foie Gras bonds. Foie gras, as Wikipedia explains, is a French delicacy made from a duck or goose specially force-fed to fatten it. That’s what the US government is going to do at some point. It’s going to be forced to shove its debt down the throat of the American public until they’re engorged with them.
All week your regular editor Greg Canavan was on a mission of discovery for you, dear reader. What does it mean when the rest of the world stops buying US government debt? Data shows that the big foreign buyers of US Treasuries are decreasing their holdings. Cue everyone’s head swinging around and looking at the only guy left standing in the room: the Fed.
Somebody has to finance the deficit of the US government. That means you can dismiss any talk of the Fed ‘tapering’ their bond purchases for now. That’s showing up right now with the Aussie dollar moving higher and the euro hitting a two year high against the USD.
But rather than relying solely on the Federal Reserve, if the current trends hold, the next move for the US government could be to mandate that all American pensions hold a certain percentage of their assets in US Treasuries, most probably for ‘safety’. This could require some bogus scare to initiate the legislation to ‘protect’ US investors. Alternatively, Currency Wars author and capital markets expert Jim Rickards suggests the big US banks will become captive buyers. Something along these lines either way will be the first foie gras move.
Of course, the US would still need to fund its trade deficit, and that requires foreign financing. What happens then and how does it affect the cross rates with the US dollar? Hmmm.
For now though, a new type of investor is in the making. Ever heard of Surprise, Arizona? Well, neither had we until this week. But that’s where you’ll find a 78 year old ‘currency prepper‘ Bernie Koerselman. Bernie’s no big hitter we gather, just a new breed of US investor, according to Reuters.
‘Currency preppers’ are banking on a big decline in the USD and aren’t waiting around to have their purchasing power stripped off them thanks to the Federal Reserve debasing the currency. Here’s Bernie:
‘"I think it’s inevitable the U.S. dollar is going to depreciate significantly in value," Koerselman says. "We’re printing money like there’s no tomorrow, and we’re losing our status as the world’s reserve currency. I don’t see any way out."
‘Koerselman isn’t alone in keeping a little cash in foreign denominations. According to Chicago-based research firm Morningstar, investors hold roughly $3.3 billion in currency exchange-traded funds – about $2 billion of that in single-currency products, and the rest in baskets of multiple currencies.‘
It’s baby steps for now, but we think this is a trend to follow in the US. We recall Jim Rogers picked currencies as the next asset class American punters would shift into in a big way over the next decade or so in his recent book Street Smarts. It’s a symptom of the global currency war.
Another symptom is Aussie Treasurer Joe Hockey injecting $8.8 billion into the Reserve Bank of Australia as a ‘buffer’.
You might recall that Wayne Swan strong-armed Glenn Stevens out of $500 million when the former Treasurer still thought he had a sniff of delivering a surplus. That left the RBA with pretty slim pickings. We’ll, they’ve got their 500 million back and then some. But it’s still chicken feed compared to the firepower of the big central banks.
Over at The Denning Report, Dan Denning says the RBA wants the resources to defend the Aussie dollar against a currency crash. He’s still tipping a grim 2014 for Australia. Why? We’ll let him state his case:
‘As Australia’s government finances worsen, unemployment rises, and the mining boom fades, the chances for recession in 2014 increase by the day…
‘Get used to higher budget deficits in Australia. The government’s debt is only 10% of GDP. That’s low compared to the rest of the Western world, where it’s about 90%. But net government debt was a big fat zero before the financial crisis. It’s now close to $400 billion…
‘GDP grew at 2.6% in the second quarter, compared to 4% the same time last year. Corporate profits are down. And the end of the mining booms has hit government revenue forecasts much harder than any official estimates reckoned it would.
‘The result? Expenses up, income down, deficits higher. The fiscal picture (government deficits) will worsen for simple demographic reasons. The cradle-to-grave welfare state is expensive. And now that national income has been reduced with the end of the mining boom, you have expenses growing much faster than income.‘
That’s one reason why Dan is on the hunt for investments uncorrelated to Australia’s GDP growth. But where? You can find out here.
for Markets and Money