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Friday, May 22, 2009

Where there's smoke, there's fire...

US Credit Rating Under Fire

You have to love Geithner's lies:

May 22 (Bloomberg) -- Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.


The Bond Market sold off hard yesterday not because of concerns about the US AAA rating (which has been under fire for over a year), it sold off over what I wrote about in The Ticker yesterday:

If Foreign Central Banks are selling into Ben's bid then the game is literally weeks or even days away from being over.

I have written for over a year about the potential for a bond-market implosion and subsequent economic collapse.

Bernanke, if he continues to play his "QE" games into this, assuming it is real, must be immediately forced from office by President Obama and/or Congress.

In short, the people with real money who have been played for patsies have had enough, they're angry, and they're sidling toward the door because they have detected the obvious: The curtains are on fire.

I and a few others have written about this now for, oh, since The Ticker started operating.

Simply put the mathematics make it virtually impossible for The United States to meet Timmy's claimed goals, unless they can manage to hold down interest rates - permanently.

This can't be done, because as you tamper with rates you create inflation fear, which of course drives rates the other way.

This is the conundrum that Bernanke faces now.  "Quantitative Easing" is at its core the printing of money and monetization of sovereign debt, which is a raw attempt to flood the market with money. 

Inflation fears in this regard are somewhat misplaced, because there is a black hole of defaulting credit into which one is attempting to issue, but it is perceptions that count in a fiat currency world, and the perception in the market is that The US Government has lost control of its deficit and budget process, and The Fed has lost control of the money supply.

Remember, demanded interest rates (by any lender and to any borrower) are a synthesis of the following:

  • The risk of inflation.
  • The risk you will not get paid back.
  • The return available in other assets.

There have been all sorts of rumblings about reserve currency status for the dollar, and they're not new. 

But what's troublesome is that estimates of the deficit continue to skyrocket, and now stand at more than $2 trillion for 2010, which is a nearly 30% increase in just a few months.

These numbers make George Bush's deficits look like chump change, and the problem isn't so much the number as it is the direction and velocity of change.

As government continues to deficit spend they inevitably "crowd out" private borrowing and spending, as taxesmust rise dramatically in order to fund the spending.

Treasury has responded to these pressures by shortening duration which makes the intermediate and longer-term much worse, because now you get to add "rollover risk" to the picture as well.  Currently, the $12 trillion or so in US Debt has an average duration around 4 years - the shortest on record.  This has been undertaken in an attempt to manage interest costs, but that game cannot continue forever, and when it reverses it has the risk of doing so at breakneck speed, dramatically increasing interest cost for the government and doing even more budgetary damage.

Simply put, America's choices for government at the federal level is unsustainable; the ability and demand to spend in a deficit-ramping fashion on a sustained basis, as has happened every year since WWII, cannot continue.  

There are solutions but they're bitter medicine: The Treasury must be refilled, deficit spending must cease, and those private parties that have led us into this mess believing these would be rescued with public funds must instead be left out in the cold.

Will we as a nation take these options now, or will the market force them upon us in a few years when it is no longer willing to fund the profligate and even fraudulent cover-ups by attempting monetarily "paper over" the ripoffs and scams perpetrated upon us by the so-called "masters of the financial universe"?

That is the question facing America, and its being asked now.

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