'Ship of Fools' ... 2008 financial crisis will become 2009 currency crisis
(snip)"Japan tried ZIRP and the yen lived to tell about it. The dollar, however, won't be so fortunate and here is why. There is the equivalent of over $7 trillion deposited in savings accounts in Japan, almost half of which is in the government-owned post office. Without having to even ask, the Japanese government could use this money to buy government bonds. It was enough to cover nearly all of the deficit spending since the collapse of the bubble economy in 1990. No borrowing from foreigners and very little printing of new currency by the Bank of Japan to buy the newly issued government bonds. The US has long had a negative savings rate. It's newly issued government bonds, for the War on Terror or for pork barrel politicking, have been bought by foreigners, mostly Asian central banks with too many dollars accumulated from trade surpluses with the US. With trade surpluses falling and financing needs at home rising, these Asian central banks are less able or eager to buy Treasuries. In 2009, the US Federal government will run a deficit of at least $1 trillion, perhaps even $2 trillion. Who will buy these bonds? There are no domestic savings and the Asian central banks, read vendor financers, are balking. At last its the FED's turn, and this will prove to be its turn to fail.
The FED will print dollars, which today means creating electronic entries in its balance sheet, to buy Mr. Obama's bonds. The bond market knows this, partly because Ben Bernanke has gone out of his way to say so, and is front-running the buying of Treasuries in the hope of passing them off to the FED at a later date for a profit. A bubble of colossal proportions has developed so that Treasury yields are now as low as at the depth of the Great Depression, when the principal of the bonds was effectively guaranteed against the loss of purchasing power with a fixed exchange rate for the dollar against gold. As more and more new bonds come down the issuer's pipe, the FED will have to steadily increase its purchases with newly printed currency (electronic ledger entries). The bond arbitrageurs front-running the anticipated price increases follow a herd instinct, when one blinks in the face of the blizzard of currency creation, they will all panic and sell, resulting in a mirror image of the currently parabolic rise in bond prices. This reversal now appears imminent, with the probability of the parabolic spike in Treasuries surviving the first quarter of 2009 minimal.
It is often said that the value of a dollar depends on confidence alone. Actually, it depends on the bond market. The purchasing power of Treasuries and the purchasing power of the dollar are essentially one and the same. The end of the great US government bond bubble is the coup de grāce for the dollar. The FED may have been able to avoid this, or at least delay it, if its priority had been on protecting the underpinnings of the Treasury market, which is the only mission it can hope to accomplish, instead of destroying its own balance sheet in a vain attempt to prevent an inevitable, necessary, and ultimately healthy rebalancing of the American and the global economies. With ZIRP and quantitative easing (monetization), the FED has cast its die. The outcome should not be in doubt any longer: after the credit bubble collapse and a relatively brief period of deflation in 2008, the actions of the FED and other central banks around the world will undermine sovereign bond markets, which are poised for collapse in 2009. "(snip)
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