4 July 2009

Willie ~Watch the primary US bond dealers ~ Dresdner Kleinwort exit

My rebuttal reflects what China clearly manifests as a strategy. The rest of the large creditor nations are certain to either follow the Chinese path or set out on a parallel course. Past work has called the Chinese initiatives the spearhead against the USDollar. They realize they must smother (but not kill) the USDollar slowly, eventually suffocating it only at a time their many initiatives are fully deployed in place, much like a neck noose built into a straightjacket. The strategy has two important sides. First, they are protecting their outsized core of US$-based bonds of several stripes. They choose not to embark on any aggressive strategy that would seriously undermine their core holdings in reserves. However, they are not stupid. They see the unprecedented and colossal debauchery of the USDollar via trillion$ in new debt, with seemingly little or no concern over foreign reserve holdings, demands, or priorities. The USGovt believes it can deflate its debts one more time, delivering foreigners weak coffee at the lunch counter, and get away with it. They cannot time, not this time, especially since the USEconomy is stuck in a deteriorating spiral, the US banks are insolvent (despite phony accounting), US households are insolvent, and US industry is either absent or depleted. Foreigners are far too aware of the USGovt attempts to inflate debt away, actually an impossible task as those debts multiply like bacteria, or better described as CANCER. The US leaders want to reduce both the value of the debt burden and assure that its ongoing service costs are kept low. Foreigners are in revolt, threatening to pull the plug.

So foreigners have embarked on a broad response. Second, they are diversifying away from the US$ at the margin in bold moves. They are devoting NEW trade surplus funds to hard assets, like stockpiles, like grand production contracts, like large acquisitions and partnerships. They are regularly urging wider acceptance of the I.M.F. bonds as an alternative to storing surplus funds outside the US$ sphere. In fact, the Chinese lead the global initiative to end international contract settlement in US$ terms, after several decades. They do so with yuan currency swap facilities scattered across the globe like so many automatic teller machines. They do so with historically unprecedented bilateral barter accords, whose systems are being assembled and put into place. See Russia with China. See Russia with Germany also. The stockpile movement is not strictly a Chinese phenomenon. The Shanghai Coop Organization (SCO) recently completed a global meeting, with several key invited guest nations like Brazil. Their unstated purpose was to make concrete steps in contract settlements for a variety of commodities (from crude oil to natural gas to industrial metals), and do so without USDollar involvement. The June SCO meeting in Yekaterinburg Russia was hardly covered by the US financial press. Where it was covered, it was downplayed. Also, despite its many problems within the European Union, like economic recession and wounded banks, foreigners are flocking to the Euro currency, now over 141 and pushing toward 142.

NO, the major theme of 2009 on the Psychology Billboard is REVOLT AGAINST THE USDOLLAR AT THE MARGIN, NOT THE CORE. The foreign creditors and suppliers to the Untied States are in a coordinated global revolt position, being fortified with each passing month. That is the major theme of 2009. Notice the shutdown in Chinese purchase of USTreasury Bonds, down to a mere trickle since October. In fact, the objective of those in revolt is to play down their revolt, to talk nice to the USGovt (which controls an aggressive military), to utter empty words about support for the USDollar, but to work behind the scenes to undermine it AT THE MARGIN. Their exercise is akin to soothing and singing to a large wounded beast, as it is being surrounded, tied up, and muzzled. Their objective includes a pace of undermine intended to be gradual.

Foreign creditors wish to use their USTBond reserves in constructive intelligent manner. The Chinese recently announced a dedication to hedge funds from their vast sovereign wealth fund holdings, a likely avenue for USTBonds used as collateral in accounts. If properly deployed, with sufficient volume, additional USGovt debt can be used to fortify the commodity prices and prevent a perverse unjustified USDollar rebound, built upon failure and liquidation. Slowly but surely, the credit supply for the USGovt and USEconomy will be reduced to the point that later, unclear how much later, it will be cut off.


Reading economic reports from foreign lands serves as a distraction to this entire ill-footed deflation versus inflation debate. Some like my outspoken acquaintance believe that foreign economic distress assures continued decline in US asset prices. They miss the main point. Foreign economic distress assures less trade surplus recycle into USTreasury Bonds, and further isolates the USDept Treasury into monetizing their debt. A DEEP ISOLATION COMES TO THE UNTIED STATES AS FOREIGN CREDITORS BOTH REFUSE TO FUND AND CANNOT FUND THE PROFOUND CRIPPLING US DEBT. Hidden within the bowels of the funding process is the gradual destruction in the official bond primary dealers. Last week, Dresdner Kleinwort decided to exit in its role as a primary bond dealer. The US-based dealers are sitting on a mountain of inventory, acting like a huge collection of boulders on a medium sized vessel at sea. Primary dealers now have a record $368 billion in Corporate, Agency (mortgage), mainstream mortgage bonds, and USTreasury inventory. And the vast bulk of their holdings of USAgency debt has less than a 3-year maturity. Just like the private equity groups and Wall Street firms, they are heading toward a day when they choke on their own feces.

The USEconomy is most vulnerable to price inflation, due to US$ weakness and revolt globally against it, as commodity prices are inversely linked. The USEconomy is perversely the most protected from price deflation. The deflationist argument might possibly hold some water with foreign economies, as their currencies rise enough to harm export trade, as their strong currencies keep commodity costs down. The Deflationist Knuckleheads at best have it backwards, and at worst continue to be lost.


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