The ground is giving way beneath our feet: Sell the dollar…Sell Treasuries.
People still stand their ground…they do not panic. They do the right thing. But then, they go into work – but find they have no jobs. They look at their pension account – wisely invested in a diversified portfolio – and find that it has lost half its value. And their houses lose 20% of their value. In places such as San Diego, Las Vegas and Miami, the losses are more like 30%- 40%.
The ground gives way…and they find themselves in Hell.
Friday, the Dow registered a 61-point improvement, after much disappointment the day before. Is the rally on or off? We don’t know…
But what MUST happen, WILL happen. Fish gotta swim. Birds gotta fly. And bubbles gotta pop. The bubble in private debt has popped already. And now, the bubble in public debt has to pop too. And the dollar’s got to go down. That’s when the ground will really give way… For many people, the collapse of the dollar will wipe out what is left of their assets. Pension funds and insurance companies will be devastated. Savers will be unsaved.
Investors have rushed from risky investments of all sorts – emerging markets, mature markets, real estate, commodities – into the strong, welcoming arms of the U.S. Treasury market. “Give me your tired, your poor huddled masses of dollars…yearning for protection from capitalism,” says Uncle Sam. “And I’ll give you 2.58% return over 10 years. Give me your money for 91 days, and I’ll give you nothing.”
Is that a good deal, dear reader? It depends on how solid the ground is under the U.S. Treasury market. So far, as the ground gives way under other asset classes, the Treasury market has held solid.
But here is why the word “must” was invented. When something’s gotta happen, it’s gotta happen. The U.S. federal government already has an official national debt over $10 trillion. The deficit for next year will likely exceed $1 trillion…and could reach up to $2 trillion by 2010 – or more than 4 times the biggest deficit the country has ever run…and more than the entire U.S. budget only seven years ago. At this rate, in a couple of years, U.S. debt will exceed US GDP.
Is it likely that the feds can so greatly increase the quantity of U.S. debt without reducing the quality of it? Is it likely that the last IOU issued by the federal government will be as valuable as the first? No, it’s not likely. Something’s gotta give.
And we are talking about big money. A business or a small government can sometimes borrow more than its annual revenues. It’s borrowing can be funded by a small percentage of the world’s reckless savers. Lending to U.S. government on such a scale is another matter. It takes up a large percentage of the world’s total savings, effectively shouldering other borrowers out of the way, and actually reducing the world’s capacity for economic growth.
Everybody, except bankers of course, knows that lending large amounts to a small country is extremely speculative. But lending to the United States for ten years at 2.58% has a nasty stink of certainty about it. You can’t borrow that kind of money without some consequences…and the consequences of that much debt are bound to be bad.
To us, it seems almost inevitable that it will turn out to be a bad place to put your money. Because the ground is almost sure to give way beneath the feet of Treasury-market investors. How so? Ben Bernanke has already told us. When the borrowing gets tough, the Fed will turn to other forms of liquidity – buying U.S. Treasury bonds itself. In other words, instead of borrowing from savers – thus leaving the net money supply unchanged – the Treasury will borrow from the Fed. Where will the Fed get trillions of extra dollars? It will create them out of thin air.
That’s why the dollar has turned down.
“Greenback’s haven status thrown into doubt,” reported the Financial Times.
Last week, the euro jumped to $1.33 – a level it hasn’t seen in many months. And gold keeps edging up. It’s up to $820 an ounce as of last week.
The dollar is Hellbound, dear reader. Sell it. And sell Treasuries too. We might be early with this advice. But we won’t be wrong.
*** “What Hell Really Is…” said the sign in front of a church in Arizona. “Choir practice at 4 PM!” was the next line.
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