3 June 2009

Endless monetisation of US debt ahead ~ Jim Willie

Behind the bushes, a powerful billboard message can be seen by the trained eye, accompanied by loud signals audible to the trained ear. The US Federal Reserve will be forced to continue the gargantuan monetization scheme. The first round was announced in mid-March, for $300 billion in USTreasurys and $750 billion in USAgency Mortgage Bonds. Most did not give a second thought, that it was a one-time event. WRONG! The monetization news dealt a powerful blow to global confidence in the US financial system generally and the USDollar specifically. The $1 trillion monetization will be repeated, and even become a quarterly event, much like a constant sub-surface flow of water to remove a foundation built upon sand.

The trip to China by USDept Treasury Secy Geithner should be viewed as a key reassurance to these important creditors, later to be viewed as a betrayal. The Chinese audience responded with loud laughter when Geithner assured them that their $2 trillion in savings was safe and secure. This was a national humiliation event, as Geithner has been muzzled. If only the USCongress had such broad wisdom and deep courage to laugh when Goldman Sachs henchmen ‘(Made Men’) from the syndicate gave regular speeches laden with deception and rationalizations for their continued fraud. Then again, the Chinese audience is not on the receiving end of graft and bribery, nor the object of revolving doors.


The group of 20 to 22 bond dealers with contracts to sell USGovt debt securities are under siege, suffering a grand new plight. This is perhaps the best kept secret in the entire credit market right now. The USFed primary bond dealers are being squeezed. They actually have some power to respond. They are at risk, and face a possible rapid extinction. Despite the rising long-term USTBond yield, money going into USTBond purchases in general is growing like a powerful torrent. Demand for USTBonds is growing fast, very fast. Bond supply is rising faster than demand though!! The role of primary bond dealers is to hold inventory as intermediaries, a prospect that makes those dealers LOSERS right away. Auction sizes one or two years ago used to be $5 billion, $10 billion, even $15 billion on a given month. Just last week the official auction was for $110 billion, a 10-fold increase. The pushback comes from these primary bond dealers, who collectively possess the power to tell the issuer (USDept Treasury) and the agent (USFed) that buyers just do not exist in sufficient volume to absorb such huge regular supply. Fear has entered the hearts and minds of the dealers. They will soon tell their bosses at Treasury and the USFed that more monetization must come in order to lighten the supply load, or else face a renewed crisis, at least horrendous negative publicity. The credit market trucks are breaking down from the weight. The $300 billion monetization sounded like a big amount, but it is not. That amounts to two or three months in supply, if the $1800 billion in USGovt deficits is to be financed. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in failed auctions, crushing losses by the primary dealers, and their possible disappearance. Remember what happened to private equity firms stuck with their own stock and bond inventory? They went bust. That is precisely the risk to these bond dealers.


The trend is clear for those with open eyes. The official bond auctions will continue relentlessly, probably well over $100 billion per month, for perhaps twenty months at least. Worse, the USGovt federal deficits will be much bigger than estimated. Here is a sobering fact. The USGovt tax revenues are down 35% year over year. For the first time in US history, the tax collection month of April 2009 was a net negative month. Expect the USTBond supply pressures to build, not reduce. My conclusion is clear. PURE MONETIZATION WILL SOON BE A REGULAR QUARTERLY PROMISE. IF NOT, THEN A USTBOND DEFAULT THREAT LOOMS NEAR ON THE HORIZON, OR A POWERFUL SUDDEN STOCK MARKET COLLAPSE WILL ENSUE. A monetization commitment forestalls a USTBond default at a later date.

Meanwhile, the economic impact of this unremedied crisis will slowly be recognized. Watch the job losses, which continue in huge numbers. Watch the home foreclosures, which continue in accelerating numbers. Watch the national home prices, which continue in steady declines. Recall that the USEconomic recovery that began in 2001-2002 was built upon a housing bubble as a foundation. The burst of that bubble is absolutely not a completed process. The national insolvency will take its toll on USTreasurys as a certain reflection. The debt downgrade (imminent, scheduled, expected, who cares its label?) of the UKGilts two weeks ago should have awakened the world to the perception of the USGovt debt as Third World debt paper. The government finances of the United Kingdom are no better and no worse than those of the United States. The global reserve status of the USDollar and USTreasury, the greater size of the USEconomy, these only guarantee that the impact of the US fiasco have broader shock waves. The fiasco is tied to the USGovt committed debt being transformed into debt securities, the USTreasury Bonds. It is a gigantic hairball. It is like a rattle snake swallowing a goat.


The USTreasury Bond supply (skyrocketing) is growing much faster than the rising demand. The untold story is that demand is rising in stride to take the rising bond supply, FOR NOW. A rising USTBond long bond yield does not mean necessarily that money exits. Price is determined as demand meeting supply. The rising bond supply will be continuing, not just for a month or two, but for a year or two or three, maybe four. Projected USGovt federal deficits are due to occur for as far as the eye can see. Bond analysts knew that big problems would result. They have begun. Huge USGovt debt commitments ensure a skyrocket of continued USTBond supply. It is sucking in funds all over the financial markets, like a Black Hole. The stock market is at growing risk for its available funds. The primary dealers have the ability to put pressure on fund managers of a wide variety. Those managers will be urged to purchase more bonds, to alter their allocation ratios, and to respond to government pressures. Some will be lured to earn future favors. The Dow Jones Industrial stock index and the S&P500 stock index have begun to stall, after quite a run powered by short covering, relaxation of accounting rules, and widespread talk of early sightings of recovery evidence. The gargantuan outsized USTreasury Bond auctions must find funds to feed the beast, and the stock market is a nearby target. The great Black Hole of USTBond issuance and sale has the potential to draw the entire stock market into its vortex. The conclusion is simple, and the USFed must respond. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in painful stock market declines, the effects from which the public observes and understands well. Their pain usually results in hue & cry, and if not addressed, panic.


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