Matt Demon!

Matt Demon!

It never listens to voices of the rest of the world.

Matt Demon!

Go and do it in your way. But in the near future, no one wants to trade in the dollar…Just you!

Matt Demom!!

1. Assumption: 50-60% foreign participation in treasury securities must abate…
Response: Why? what other asset that central banks own has performed nearly as well? Why are they selling? What are they buying instead?

2. Assumption: $1.5-$2trn in treasury issuance will overwhelm demand…
Response: Capital markets are CLOSED…Corp issuance and pvt mkts are shut (how many non IG-credits are pricing?) so capital allocated to fixed income will move accordingly..
3. Improvement in crude component of CA deficit worth about $450bn at $50 vs $150 oil
4. The US consumer DID save at one time and will do so again. Losing your home (and tighter credit + lighter 401k) will do it
5.How many who disparage the USD predicted it’s recent rise? In my world, those who are consistenly wrong get eliminated (unless you’re Abby Joseph Cohen)

Ummm… 30 year Japanese bonds are yielding 2%. They are having difficulty issuing debt? I wish I could borrow at 2%.

http://willworkforjustice.blogspot.com/2008/09/ocm-other-countries-money.html

Yves,

How do the Fed swaps play into this? ed has put massive swap lines in place and has said that this could become a permanent fixture. Might this be used as the hose to wash the money through? Like a big money laundering oepration.

As for Mis and the banks arbitrage. This sounds like the same argument peopl;e made in 2006 as for why house prices will not go down. indeed there was a HArvard chap who wriote it was becasue of regulatory arbitrage. The treasuryt market is to 2008 what subprime was to late 2006.

http://ftalphaville.ft.com/blog/2008/11/19/18438/the-great-currency-of-china/

How much of a spread the treasury is willing to bear in exchange for not having to choose the politically toxic option of foreign denominated sovereign debt is the real guess. As it is, JPY long bonds yield 2.5% while corresponding treasuries yield 4.5%. In other words, we’re already paying a 2% premium to keep our debt in USD (something the Yen carry traders currently take advantage of). Exactly how much of a premium are we willing to pay?

All that said, I’m not sure the U.S. will take this option before exhausting a second option, namely currency controls. Many countries that have found themselves staring down the abyss of a rapidly depreciating currency and accumulating debts have gone this route (cf Russia in the ’90s, many Asian countries during the Asian crisis, etc.).

While it’s certainly not a long-term solution in a country that runs massive current account deficits, it can provide some short term relief, albeit at long term damage to one’s reputation (and in the case of the U.S., likely irreparable). And our Government has been known to occasionally follow such shortsighted policies from time to time (cf. TARP, TAF, TSLF, short selling ban, etc. …)

David Merkel
A Modest Proposal for Balancing the US Budget in the Short-Run
1/9/2007 11:06 AM EST

This is not meant seriously, but an easy way to balance the US Budget in the short run is to issue Japanese Yen-denominated debt. Current interest costs would drop rapidly, and the budget would balance.

What’s that you say? What if the Yen appreciates versus the Dollar? The US has an ill-disclosed balance sheet, with many of its liabilities omitted, or merely disclosed as footnotes… Medicare, Social Security, the old Federal Employee defined benefit plan, etc., are all off the balance sheet. (And on the plus side, so is the value of most of the property of the government, as well as the present value of its taxation capabilities.)

Leaving aside other things that are off-budget (e.g., Iraq, Katrina relief), borrowing in foreign currencies is just another tool that the Federal government can use to put off today’s costs off to a future date. It’s something that our government does well.

Position: none, though I own TIPS, realizing that they are only second best to developed market foreign currency debt, and the US Labor department controls the CPI calculation…