Shadows Over Green Shoots

The green shoots are weeds

Wall Street investors need to pay attention to US treasuries instead of jumping into stocks. Why? Because the government can only raise money three ways: 1. Tax it out of the people 2. Borrow it by selling Treasuries with the promise of paying interest on them or 3. print it. Our glorious members of Congress (which, by the way, is the only govt body that can spend money or raise taxes...the president can only either sign the bill into law or veto it)...anyway, since September of last year Congress has now spent 4.4 Trillion dollars and obligated us for another 7 trillion in future years. This year, in order to get the money to spend, the govt must sell 1.75 Trillion in treasuries by the end of the fiscal year which ends on 30 September. This is almost as much money as the surplus that the Chinese have in their bank. The question is: who is going to buy all these treasuries? It is clear that the Chinese and the Japanese aren't going to buy much more. They, along with South Korea and 10 other asian nations just agreed last week to establish a regional reserve of $120 Billion. In addition, China has made currency swaps with other nations. It is clear that they are setting up a regional reserve currency. This is straight up decoupling from the dollar. The reserve agreement hammered out last week also includes the selling of asian bonds. So, back to the question: Who will buy US treasuries? Europe? Africa? South America? Australia? Certainly not China and Japan...they have so much on their plate with setting up their regional reserve currency. Perhaps Martians or some other Extra-terrestials will buy them?

The answer is: our own central bank (aka the Fed). They will print the money and buy the IOUs (treasuries) from the US Treasury Department. In short, our government is going to have to print trillions. If the dollar does not collapse, it will will be the first time in the history of economics that multiplying the money supply by four, five or six times doesn't result in inflation.

(Can you say Argentina, boys and girls? How about Weimar Republic? Zimbabwe? Iceland?)

Financing the massive federal spending will prove impossible without either gargantuine interest rates or massive devaluing of the dollar. So investors should be concerned. If you buy a stock that doubles in its dollar value, you haven't made any profit if the value of the dollar declines to 20% of its value since the time when you made the investment. So having twice as many dollars hasn't gained you anything. Such investors will lose twice. First, their return on investment will be paid to them in less-valuable dollars. Second, in nominal terms, you will have made twice as many dollars...hence you will have to pay a capital gains tax on it. So investors lose more wealth. Investors in dollar denomianted assets will lose several fold.

In my opinion, the only green shoots showing up in the economy are weeds that will soon choke the life out of the US economy.

R. P. Reitz of FL @ May 09, 2009 22:17:10 PM