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March 15, 2009

Does the president normally assert that T-bills are sound?

Just curious.

I'm guessing that the president is volunteering because China asked. Has this ever happened before? 

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When Bush was trying to privatize Social Security, he did the opposite.

He described the $1.7 trillion in treasury bonds that make up the Social Security trust fund as "just IOUs."

The Obama administration projects deficits throughout his term. Since there is no plan for getting the economy on a "pay as you go" footing, I'm sure Obama is out there, trying to assure foreign investors to invest in our deficits, so that our interest rates don't run up.

But, the fact is, if Obama doesn't want to bring costs in health care to levels our competitors pay and Obama isn't interested in rolling back our military expenditures, then the question of whether our treasuries are sound is legitimate. You gotta remember that AAA securities never failed, until new AAA securities (mortgaged backed securities) turned up with a new criteria for grading AAA securities not used for prior securities. So, a new frontier in treasury securities isn't unimaginable.

Our greatest foreign policy disaster isn't Iraq, it's allowing our nation's policies to be dictated by its largest creditor, China. Before Nafta and WTO, our nation was the worlds largest creditor nation - now, it's the worlds largest debtor nation. That along with nearly a decade of trade deficits, and we still search for a reason why "free trade" isn't working?

Then throw on top of this, the principals in our corporate oligarchy, the banks, extort us by telling us that "we're too big to fail, if you let us fail, we'll inflict economic ruin on you all, so pay us trillions", so we're paying, big dig style, a few 10 trillion at a time.

It's time to wake up, and wipe the question mark off your foreheads. Obama is yet another errand boy for the corporate oligarchy, as Bush was. Certainly, we'll get better Supreme Court nominees off Obama than we would get off McCain, but economically speaking, Obama is subservient to the corporate oligarchy.

this one also made me wonder a great deal.

my list of possibility: China's polite way of saying (lay down tibet, selling weapon to taiwan, or your debt rating goes to hell after we dump T-bill. hint-hint,nudge, nudge.)

or more worrisome, there is a noticeable movement in US sovereign credit swap rating in the past few weeks. (eg. the market start betting the US can't pay its debt. Basically, the world is saying, your risk is rising, it cost more to borrow money now ... )

see this entry:

http://www.portfolio.com/views/blogs/market-movers/2009/03/14/chart-of-the-day-us-sovereign-weirdness


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btw, Ireland, UK are goner. They are basically living on borrowed time, zombies. But nobody dares to say it outloud. If Ireland were a third world country like Thailand, Malaysia or Indonesia. IMF would have landed and start force selling the country piece by piece under the guise of "austerity measure"

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aazwjUxtwAUQ

Credit-default swaps on Irish government bonds rose 7.5 basis points to 355, and have jumped 95 basis points this week, according to CMA Datavision prices. Contracts linked to French, German, U.K and Spanish debt also rose to all-time highs.

NoBuddy -

NAFTA went into effect in 1994 and the WTO was established in 1995.

It was in the 1980s under Ronald Reagan that we went from biggest creditor nation to biggest debtor nation:

==================================================
U.S. Is Bigger Debtor Nation
Reuters
Published: Tuesday, July 4, 1989

The United States, already the world's largest debtor, sank an additional $154.2 billion into the red last year as foreign money poured in to plug the nation's balance-of-payments gap.

The value of foreign investments in the United States, ranging from stocks to factories, exceeded American investments abroad by $532.5 billion at the end of 1988, up from $378.3 billion a year earlier, the Commerce Department said last week.

As recently as 1984, the United States was a net creditor to the rest of the world by about $3.3 billion.

http://query.nytimes.com/gst/fullpage.html?res=950DE6D91F39F937A35754C0A96F948260
================================================================================================

I am certain no president in modern times has ever proclaimed that the US Treasury is sound. Firstly because it has never been a question in modern times and second, saying it is a display of weakness. At least saying it as a proclamation and not in answer to a questions.

Now the US Treasury was a very rickety contraption in the early days of the nation and even right through the Civil War but with Americas seemingly unlimited land and resources and the total lack of any military threat against it I don't think there was ever much doubt that US Treasury debt was good.

Nobody made China buy Treasury, and agency (more on that in a sec) debt. Their purchase of so much of it was an integral part of the late phase of the boom and they didn't do it with their eyes shut. Shut even to the probability that it would be a poor 'investment' over the long term. The short and medium term benefits came first. It allowed them to expand their money supply at an astounding rate and it provided the US with the cheap credit it needed to keep our boom, and the Chinese one going. The first point about money supply has to do with the fact that they did not sterilize the dollars they took in and exchanged internally. (Probably confusing to most, sorry)

One of the fascinating things is that after 2004 the Chinese central bank began huge purchases of GSE paper. This was in effect a bailout of the mortgage securitization model and lead directly to the final blow off. GSE debt did not have the promise of the "full faith and credit of the US" that Treasury debt does per the constitution. GSE debt now has the explicit verbal guarantee from the Treasury but that doesn't make it so. China went on it's GSE MBS binge after a Greenspan visit there. He begged, they went along.

Anyway in fact the US Treasury debt held by foreign central banks is probably safe unless we are going back to the Middle Ages. However for us the important thing is what happens to the $4 to $5 trillion in new paper we have to sell over the next two years. It is probable that the demand might not meet the supply at these interest rates so rates may spike. Which in turn will slow the beloved growth everyone wants. Well not everyone. The worse possibility is that the Treasury, us in other words, may not be able to sell all the bonds it needs to fund what Congress demands to meet our spending goals. If and when that happens then everything you know about America will be changed. A century of absolute unquestioned financial and economic world leadership will have passed.

Eric: the US started running current account deficits in 1971. The free trade connection is incidental - though as I keep saying, the average protectionist wants to hear that to the same extent the average Detroit booster wants to hear what people think of the Big Three.

Squashed: people who bet money on a US default are idiots. If the US defaults, pretty much every other financial asset in the world becomes worthless.

Alon, I start to think there is non negligable possibility of US defaulting.

I think the Federal reserve has dragged US balance beyond solvency. I really was wondering why the chinese asks that question. What if they honestly worry? (eg. deep in their listening posts, the find out the real number.)

But this is my wild suspicion... hope it isn't so.

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/8

The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama's Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner — himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top aide.

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