The Chinese are starting to switch from investing in U. S. Treasury bills to buying hard assets for stockpiling or acquiring corporations at bargain-basement prices. Others are buying gold.
This week, Washington surprised markets by mopping up 5% of its own treasuries, a form of printing money to finance deficits the rest of the world no longer wants to -- or cannot --finance.
It's inflationary, which is why the U. S. dollar tumbled about 3.5% on Thursday. But there are many more T-bill cannibalizations to come because deficits are going to reach the stratosphere until this bottoms.
Whatever the reason, we should be worried about the Americans. The new regime looks a lot like the old regime, only newer with the same old faces. Concern should be that United States' system of government may have reached its best-before date because, like its financial sector, Washington appears paralyzed and unable to deal with this crisis.
The problem now is the problem solvers, both financial and political.
The world as we know it ended because Wall Street, AIG and banks made bets to protect trillions in bond values -- bets they could not pay out if they were wrong. Massive fees blinded judgment, and a regulatory vacuum permitted recklessness.
Lacking anyone to mind the proverbial financial store any more, the board of directors is the executive and legislative branches in Washington.
It's a system of paralysis, through checks and balances and lobbyist corruption, that has been made worse by a two-year primary tangle for the presidency, partisan battles over the crisis and a succession of treasury secretaries and Federal Reserve officials, appointed by both parties, who don't get it or have conflicts of interest.
For instance, Republican appointee Alan Greenspan printed too much money for years. In 2007, the tipping point was reached and the response to the credit meltdown was when Henry Paulson, a Republican Treasury Secretary, rescued his old Wall Street firm, Goldman Sachs, plus AIG and others, but left some to go bust, such as his former rival, Lehman Bros.
Now we have Timothy Geithner, a Democratic Treasury Secretary, who has a conflict because he didn't see the trouble coming either when he was at the Fed with Greenspan.
Lots of opinions are out there, but here are a few of the more thoughtful ideas as to what the future holds: - Gold is the safety play as the U. S. dollar slides. Some estimate gold may reach as high as US$1,500 an ounce in 2009. - AIG and the others should be, and will be, put into a de facto, strict bankruptcy workout. - China is concerned about the fact it holds US$1-trillion of the U.S. debt and is diversifying its portfolio as well as not buying more U. S. treasuries. Neither will the Saudis. In all, foreigners represent US$2-trillion of the total US$11-trillion in U. S. federal debt, but it is hot money that can flee in a click. - Obama will -- certainly should -- replace Geithner, preferably with a European or Canadian or Asian team who get it and haven't got conflicts of interest on Wall Street. - The U. S., and most of the world's, banking system may eventually have to be nationalized in order to systemically and fairly recalibrate the financial economy. This will also allow the Americans to write off 25% of all mortgages, subprime and others, to kick start the real economy again. - Canada and everyone else will be dragged through this process, which will take as long as it takes for the Americans to admit they have to reinvent their systems.
dfrancis@nationalpost.com
Read Full Article »