Wednesday, December 17, 2008

The Next Financial Crisis

Market Ticker lays it out for us.

...Treasury seems to think they can issue essentially limitless debt to bail out banks and others, having committed nearly $7 trillion thus far. Most of that has been issued through various short-term paper which has a near-zero (or actually zero!) interest rate - that is, up until now that debt issue has been essentially free!

What happens when this bubble bursts?

You think it won't? Like hell it won't. And when it does - that is, when Mr. Market calls the bet and forces Bernanke to actually make good by starting to unload all these "accumulated" Treasuries into his gaping maw, we will see "shock and awe" of another sort.

See, if the selling starts rates go up. To stop that Ben has to take up [i.e., increase] the supply. This causes him to print more money (expand his balance sheet) which means that the full faith and credit he relies on is further damaged. That in turn causes more people to get the idea that they better sell now which in turn causes him to buy more which.....

Remember the waterfall in September and October in stocks?

The same thing can happen in the Treasury market, and if it does it will force a political decision to be taken - risk the destruction of the dollar and our government or remove - by immediate statutory change (and force if that is resisted) The Fed's authority

My opinion of John McCain has just increased by several notches. He did NOT "lose" when he lost the election.

He allowed the nuke to detonate in Obama's lap.

Ooda-Loop, indeed.

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