BILL BUCKLER OF PRIVATEER

BEST OF BILL BUCKLER
http://www.gloomdoom.com/thebestofbb04-10-08.html
April 10, 2008
After the many dramatic events over the past two weeks - we're all saved! At least that is the message being preached in the US.
The Dow is above 12,000 again. The S&P 500 is above 1300. The US Dollar even had a global rally in the lead-up to Easter. Its nemesis, Gold, fell nearly $US 86 in three trading days and Oil went back to $US 100.
That General Perception Is Entirely False:
In principle, not one economic or financial issue has been solved or even addressed. All the fundamental US problems are still there. They have been literally papered over. The Fed cut interest rates and slammed still more new fresh money into the US financial system to keep it liquid. The Fed is exposing its own balance sheet to an amazing degree, offering up $US 400 Billion in Treasuries as short duration "swaps" in return for unmarketable toxic sludge of US mortgage paper.
The Fed had held about $US 800 Billion in Treasury paper, paper that it acquired by "monetising" the US Treasury's debts. This paper is at the core of the Fed's financial holdings. It is the Fed's major "asset". Now, by having sent $US 400 Billion out the door, the Fed has in fact sold down its capital by half. Please note here that the Fed's liabilities – the US Federal Reserve Notes (US Dollars) - have not fallen in quantity.
If any private financial company had done what the Fed has done, most people in finance would instantly recognise that its liability to asset ratio had doubled. That alone would make holding its liabilities, US Dollars, much more dangerous. What is certain is that the Fed cannot repeat what it has just done. To do so would strip it entirely of capital on its own balance sheet. If the Fed is not now "done" - then it is done for!
A Financial Strategic Overview Of The US:
There are three main economic forces at work inside the US economy. The first is monetary and financial and involves an involuntary de-leveraging of US banks and financial institutions. Everybody is trying to contract credit issued while holding the cash still rolling in. This is contracting the volume of credit quite dramatically and adding to the liquidity crisis inside the US. The second is the situation inside the US economy as it rolls into recession, seen in the fact that nearly nine million US households now have "upside down" mortgages. For the first time ever, aggregate mortgage debt is bigger, by $US 836 Billion, than the total value of homeowner equity. A credit contraction augmented by (real estate) price deflation is a huge monetary and economic force. These two forces are mercilessly squeezing the third force, which is the Fed (aided by the US Treasury). The Fed is caught in a vice from which there is no escape.
The Walls Are Closing In On The Fed:
On March 18, the Fed Funds rate was cut by 0.75 percent to 2.25 percent. The Discount Rate was cut by 0.75 percent - after having been cut by 0.25 percent two days previously – to 2.50 percent. Here too the Fed's back is up against the wall. Having exposed its capital to genuine market risk, the Fed cannot make a similar move again or it would stand stripped of all its core capital.
In terms of the interest rates it offers to US banks and other US financial institutions, a few more emergency cuts would put the Fed in the same position as the Bank of Japan with rates of 0.5 percent. The Fed Funds rate is absurd with US internal consumer prices climbing at 4.3 percent annually.
The Climbing Danger To The US Dollar AND The US Treasury:
The alarm bells should be ringing all over New York and in Washington DC. Foreigners have noticed these recent massive falls in the US Dollar. On their own balance sheets, when accounted back into their own currencies, they are looking at enormous losses. So far, these losses have not been brought to book since that would knock huge holes in the balance sheets of their own commercial banks' and other financial institutions which hold US Dollars and/or US paper assets. That will come later this year. Most private banks normally only have to report in depth once a year. When large losses start appearing on the books of a bank - and they will - the usual reaction is a buyers' strike, followed by sales of the "asset".
International investors are now avoiding US financial assets, making it harder for the Treasury to fund a growing budget deficit. NET sales of US stocks and bonds by private foreign investors totalled $US 38.2 Billion in January, the most since September, the US Treasury Department reported on March 17.
This is the precise point where any further cuts in interest rates by the US Fed become deadly dangerous. The Fed could end up in a situation where its official interest rates are so low that no foreign buyers show up at a scheduled US Treasury auction! Were that to happen, it would be like a global call to all the rest of the world to STOP CREDIT to the USA! We are not there yet, but foreigners are slowly leaving.
To see this, examine what happened to Bear Stearns the week before it nearly crashed. It could not borrow funds from anywhere but it still had its scheduled payments to meet. In mid March, Bear Stearns' cash holdings fell from $US 17 Billion to less than $US 2 Billion. This is the direction in which the US Treasury is now heading. If the US Treasury cannot borrow from foreign sources of money, it cannot fund its fast climbing budget deficit! But the Treasury too still has to pay money out to finance the US government's $US 3 TRILLION plus budget. When the Treasury's till is empty, it will have to send all the sequential truckloads of debt paper over to the Fed, which will have to accept all it gets. Then, the Treasury's debts will be "monetised" to an extent never
seen before!
It is this, a Fed "monetisation" of US Treasury debt paper - where the Fed creates new US Dollars as fast as US Treasury's debts arrive - which is the greatest danger to the international value of the US Dollar.
Travelling Further Along The Road To Weimar:
This process too was a part of the three-year Weimar Republic sequence which destroyed Germany's currency. Back then, even if the German Treasury could report that total tax revenue had climbed by 600 percent, this was totally overpowered by the fact that internal prices in Germany had climbed by 8000 percent over the same time period. In fact, the German Treasury was short of money and government services all across Germany were contracting at ferocious speeds on that account alone.
The need to overcome this involuntary contraction of government services forced the German Treasury to send its debt paper straight over to the central bank which then looked at the face value amounts and printed ever more paper money, simply adding ever more " zeroes" to all of it.
Ó 2008 – The Privateer
http://www.the-privateer.com