The Winds are Blowing Harder

It seems the winds are blowing harder.

With the Fed's Quantative Easing, all the current bailout extensions with the promise of Trillions more, and now the imminent unveiling of Geithners new TALF plan, which will create the "bad bank" scenario (under the FDIC?!), the amount of US Treasuries being printed will soon skyrocket.

Well, we won't be alone. The EU will soon be forced to consider the same. Although, the EU is not the US, and an unraveling there is very likely. It will only take one or two prominent members to back away from such proposals, or another unexpected series of bank failures, to insure the EU will not be able to fully implement an identical plan.

Funny thing is this, the US and the EU will need for each other to buy the new bonds for either plan to work. China will not be participating at a meaningful level, they are worried about the future value of what they already have. The Indians have notoriously avoided overexposure to US and EU debt for years, and there is no indication they wish to swim in that pool now.

That leaves the handful of smaller states and unions for the Treasury to go begging too. The oil rich states won't buy many, unless oil goes back up to $100+ bbl. Japan, they just started there own bailouts, again. Korea just got us to buy back Agency bonds that had lost 50+% in value in a couple of years, so it is unlikely they buy Treasuries that have a good chance of losing some value. Brazil is busy forging new relationships with everyone except the US. Singapore? They seem to be waiting for the fallout to begin bargain hunting, plus, they are investing in food production at an increasing rate.

Who else, that can buy $5, $6, $7 Trillion or more of US Treasuries over the next few years?

Remember, China is the largest holder of US Treasuries at a little over $1 Trillion. And it took them years to get to that point. China was only able to do that because of the enormous trade surplus created by a mountain of credit in the US. China ramped up its production, and sold all of those goods, to Americans who were borrowing against the rising value in their houses.

The rise in credit, and borrowing, in the US was so great that from 1990-2007, China increased its manufacturing of goods 673%. In comparison, the US increased its manufacturing 76% during the same period.

Because our leaders are convinced we must save the companies most responsible for our current situation, they are following the same path these very companies took in getting us here. That is, the US is committed to overleveraging to try and ease the effects of overleveraging.

Paco Ahlgren, writing for Seeking Alpha, sums it up nicely;

"The U.S. government, however, wants you to believe that the only cure to this disease, brought on by decades of inflationary money-printing and easy credit – which inevitably led to malinvestment, unprecedented economic volatility, and ultimately, several horrific economic collapses – is yet again to expand the money supply and to further ease credit until the U.S. consumer resumes his relentless and irresponsible plight to spend, rather than to save. I'm at a loss as to how anyone of a sound and rational mind can honestly believe that the solution to this type of economic catastrophe is yet more borrowing and spending. It's like saying the cure for heroin addiction is an overdose. It's preposterous."

It seems painfully obvious to me this is hardly a solution. To double down on a bet, when your cards are a 2 and a 4, and the dealer is showing a 10, almost always leads to a loss of the bet.

All we can do at this point is pray the economy does not regurgitate another 2 million jobs over the next 4 months, and the government, paying 80 cents on the dollar for "toxic" assets under the new TALF, is able to recoup that 80 cents. Highly unlikely, because the government is hiring a few select hedge funds to run the program.

Most people follow the government numbers when it comes to unemployment figures. Those numbers, what the BLS (Bureau of Labor Statistics) uses, have been changed several times over the last 50 years. If we were to use the system they used in 1932 to calculate unemployment, the rate of unemployed would be over 15%. Not 8.1%

How many jobs would investment in "green" technologies, rebuilding infrastructure, and revamping our factories to produce more of our own goods would $12 Trillion buy? That is the amount committed, today, to save the existing credit system.

That $12 Trillion may be lost in entirety if the value of the Treasuries being issued falls. The government is assuming it can ease the flow of credit, which will somehow translate into borrowing, that will create new jobs. Even if it works, and that is one big if, that process will take decades when you factor in the current losses that must be accounted for first.

Somehow, we must start creating as many jobs as are being lost. With all of the resources going to propping up "zombie" banks, I find it hard to understand how we are doing that.