Baseball91's Weblog

January 7, 2009

When Credibility is Lost

Filed under: Banking,European Union — baseball91 @ 6:02 AM



The year in review:  2008 was all about listening to leaders speak of socializing losses after privatizing gains.  That is what happens when politicla campaigns from both parties exceed a billion dollars in just the race for president. 


The investment bible Barron’s is warning of a bubble in U.S. Treasuries (government bond market) warning that given the expected supply to finance Obama’s package, the TARP and tax cuts that they are massively over valued i.e. price too high and yield too low.  Bill Gross is to bonds as Warren Buffet was to stock (prior to 2008).  Gross is now telling  investors that they should buy almost anything else besides U.S. Treasuries, recommending  “well rated government will be able to generate the primary surpluses required to service its debt without selling much of it to the Fed on a permanent basis, or that the nation as a whole will be able to generate the primary surpluses to service the negative net foreign investment position without the benefit of ‘dark matter’ or ‘American alpha.’  -from seeking Alpha blog

“Although the US dollar and US Treasury Bills and Bonds are still viewed as a safe haven by many, There will, before long (my best guess is between 2 and 5 years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard.”  –Willem H. Buiter on the naked capitalism blog. 

Willem H. Buiter of the European Institute, Professor of European Political Economy, London School of Economics and Political Science:  “The US Federal government has taken on massive additional contingent liabilities through its bail out/underwriting of the US financial system (and possibly other bits of the US economic system that are too politically connected to fail). Together will the foreseeable increase in actual Federal government liabilities because of vastly increased future Federal deficits, this implies the need for a future private to public sector resource transfer that is most unlikely to be politically feasible without recourse to inflation. The only alternative is default on the Federal debt. There is little doubt, in my view, that the Federal authorities will choose the inflation and currency depreciation route over the default route.”



“If I can figure this out, so can anyone in the US or abroad who follows recent economic developments. The dawning of the realization will lead to the dumping of the assets

“Following World War II public debt stood at more than 100 percent of annual GDP. He now anticipates a federal deficit of between $1.5 trillion and $2.0 trillion for 2009 and something slightly lower for 2010.


“Those familiar with the post World War I and post-World War II public debt levels will not be impressed with even a doubling of the Federal debt held by the public as share of GDP, from its current level of around 40 percent of annual GDP (federal debt, including debt held by other government agencies, like the Social Security Trust Fund, stands at around 70 percent of GDP).  That, however, was then. The debt was incurred to finance a temporary bulge in public spending motivated by a shared cause: defeating
Japan and the Nazis. When current debt is a result of the irresponsibility, profligacy and incompetence of some, achieving a political consensus to raise taxes or cut spending to restore US government solvency is going to test even the talents of Barack Obama….


“There is no chance that a nation as reputationally scarred and maimed as the US is today, could extract any true ‘alpha’ from foreign investors for the next 25 years or so. So the US will have to start to pay a normal market price for the net resources it borrows from abroad. It will therefore have to start to generate primary surpluses, on average, for the indefinite future. A nation with credibility as regards its commitment to meeting its obligations could afford to delay the onset of the period of pain. It could borrow more from abroad today, because foreign creditors and investors are confident that, in due course, the country would be willing and able to generate the (correspondingly larger) future primary external surpluses required to service its external obligations. I don’t believe the US has either the external credibility or the goodwill capital any longer to ask, Oliver Twist-like, for a little more leeway, a little more latitude. I believe that markets – both the private players and the large public players managing the foreign exchange reserves of the PRC, Hong Kong, Taiwan, Singapore, the Gulf states, Japan and other nations – will make this clear.


“Keynesian demand stimulus may work for a while (a couple of years, say). When the consequences for the public debt of both the Keynesian stimulus and the realization of the losses from the assets and commitments the Fed and the Treasury have taken onto their balance sheets become apparent, the demand stimulus will fade and may be reserved as precautionary behavior takes over in the private sector. My recommendation is to go easy on the fiscal stimulus. The US government is ill-placed financially and fiscally, to engage in short-term fiscal heroics. All they can really do is pray for a stronger-than-expected revival of global demand, without any major stimulus from the US.”


Thus watch the rise in the currency values in 2009 in the aforementioned Hong Kong, Taiwan, Singapore, the Gulf states, and Japan against the dollar.  All this amidst the threat of deflation. 



  1. Comment by paperlessworld — April 20, 2012 @ 4:53 AM | Reply

  2. Comment by paperlessworld — April 25, 2015 @ 3:36 PM | Reply

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