Thursday, March 19, 2009

The Bernanke/Obama Nuking of the Dollar: Chaos Next?

We mentioned that Bernanke is embarking on a very, very dicey course by purchasing long-dated US bonds.

That is substantiated by this article from Asia Times.

In brief:

PRChina has a lot of USD reserves, and they keep them in two accounts: the "official," about $1.95Trillion, and the "secret", about $450Bn. Their entire currency portfolio is now about 70% USD-denominated assets, which they would prefer to be about 50%.

They'll get rid of the $450Bn in "secret" funds through purchases of hard assets globally (petroleum, minerals, etc.) and manipulate the purchases so that they do not 'crash' the USD in the process.

Not too hard, because PRChina's US securities portfolio is heavily weighted to the short side (bills) as opposed to the long side (bonds.)

Then the article gets a bit dark.

The bubble in US Treasuries is getting increasingly massive and unstable with each week that passes. Deepening global risk aversion is keeping investors lined up, so far, to buy Treasuries - especially short-dated ones. And the deepening economic crisis in the US is moving its own citizens to join in the buying spree.

If the Treasuries bubble persists for much longer, and especially if it continues to mount, the massive and dangerous distortions in the global financial system and the Treasuries-induced strangulation of its credit markets will only become more severe, likely leading to a meltdown somewhere in the emerging markets, one of whose effects will almost certainly spread to engulf the severely weakened Western European and US financial sectors and plunge particularly the US economy into a deep depression, with potent negative effects upon the dollar.

Such an eventuality will tend to force global investors to evaluate the safe-haven appeal of the dollar based much more on the fundamentals of the US economy, and that will portend a stampede out of the dollar and a potentially chaotic bursting of the massive Treasuries bubble. Hence, even if the US finds buyers for its huge sums of new sovereign debt now beginning to flood the markets, the picture does not look good for the dollar beyond the short term.

Obviously, if the US reaches the point where it fails to find sufficient buyers for its new flood of Treasuries, that will also become a perilous situation for the dollar and for the huge Treasuries bubble, which will almost certainly burst as global investors seek better stores of wealth in hard assets, following the lead of China's central bank.

Either way, the US is engaged in the implementation of extremely risky and potent inflationary, dollar-debasing policies, making a loss of global confidence in the dollar in the short to medium term a virtual certainty. Even if the massive spending does restore economic growth, the US economy is likely to remain very weak for some time. That will make it extremely difficult for the US Federal Reserve to tighten monetary policy to fight off the inevitable and potent inflation that will result from today's shortsighted policies.

The fork:

When the Fed attempts to tighten, the US economy will likely be plunged into a second-round recession or depression, with obviously awful effects upon the dollar. But if the Fed fails to tighten sufficiently and quickly, runaway inflation will ravage the currency anyway.

Prudent, forward-looking Chinese officials have clearly assessed the entire situation as one demanding careful but swift action to ensure that its huge reserves are not imperiled by what has obviously become an untenable global rush into an unstable and perilous dollar bubble.

Hence, China's central bank is enacting with a sense of urgency prudent measures, both explicit and clandestine, to significantly decrease exposure to the dollar. If the details of such measures should become sufficiently public and should attract undue global attention before China accomplishes its goals, a dollar panic might be triggered.

This risk, though perhaps not major, does exist nonetheless, and it is significantly increasing as China undertakes new measures that might attract undue and unwanted global attention. However, it is also likely that China will enjoy cover and gain breathing space to enact its prudent measures while much of the rest of the world continues to rush into the bubble.

Now you know why the O-and-Savior delivered those remarks a week ago (or so) blathering about 'US securites' being "safest investments on Earth."

Except, of course, it's not likely that Obama has any idea of what he's talking about in that regard, whereas the Chinese treasury-types really DO know what they are talking about.

"Since the subprime crisis evolved into the international financial crisis in September last year, we have executed the central authorities' plans to cope with the international financial crisis and launched the emergency response mechanism. We have closely followed developments, made timely adjustments to risk management, taken decisive and forward-looking measures to evaluate and remove risks ... "''--Fang Shangpu, deputy director of the State Administration of Foreign Exchange, PChina

Limbaugh is of the opinion that 'chaos is Obama's best friend.'

We may well find out what that REALLY means in the next 12 months or so.

HT: Shoebox/Eggster

1 comment:

Michael J. Bernard said...

Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down.