Yesterday Was the Capitulation of the US in the Global Economy

[Altair]

A couple of days ago I wrote an overly long analysis of how US government debt was the final bubble in our economy and how I was unsure as to how long that bubble might last before it bursts:

http://www.itulip.com/forums/showthread.php?t=8779

In light of yesterday's events, I can now confidently say that the answer is: "not long."

I read two things that shocked me yesterday, and the report of the Fed's actions was the second. Here was the first:

http://blogs.cfr.org/setser/2009/03/...ies-has-faded/

So there you have it. As I discussed in my long post above, the US's ability to survive in the global economy- our very economic model - is based upon the rest of the world recycling their dollars into the US economy by buying our debt. The $700 billion "stimulus package" might have some arguable merit if it managed to suck in gullible dollars from overseas- that would be some kind of sad and pathetic version of "competitiveness."

Instead, we don't even get that. Instead, the Fed announced yesterday that it was just going to print money to subsidize our deficit spending. Presumably most of the rest of the Treasuries will be bought domestically so that will just shuffle dollars around in a zero sum game. The US economy is now, as Denninger aptly characterizes it: a circle jerk.

http://market-ticker.denninger.net/a...-In-Mouth.html

In the commentaries I've seen about the Fed's actions, most people don't seem to get it. They look at the Fed's actions in a vacuum, just analyzing the effect it will have on mortgage rates and the housing market. It will probably help both of those, in the short term. However, few people seem to bother to look at this issue in the context of the global competitiveness of the US and what we have to offer as a player in the world economy. At the present time, that answer is: a printing press.

I will re-post the Federal Reserve's statistics about where foreign capital went in 2006 and where it went in the 4th quarter of 2008:

http://www.federalreserve.gov/releas...Current/z1.pdf

Under the heading “Net Acquisitions of Financial Assets” you will see that, in the year 2006, at the height of the credit bubble, the rest of the world acquired the following amount of US financial assets.

2006:

Treasury securities: 150.4 billion
Agency and GSE- backed securities: 222.7 billion
US corporate bonds: 541.0 billion
US corporate equities: 119 billion
Securities Repurchase Agreements (RPs) 109.4 billion


After the credit bubble burst last fall, here is where foreign dollars went:

2008 (4th Quarter)

Treasury securities: 1094.0 billion
Agency and GSE-backed securities: negative 1006.4 billion
US corporate bonds: 2.4 billion
US corporate equities: 18.1 billion
Securities repurchase agreements: negative 1273.1 billion

As you can see, in the 4th quarter of 2008 foreign money went stampeding out of private sector investment in the US, especially the security repo agreements that the big Wall Street banks use to finance their operations. But, I thought, at least an extra trillion dollars went into Treasury bonds, suggesting that the rest of the world still had faith in the creditworthiness of the US government. Well, in light of Setser's story linked above and the Fed's action yesterday, we don't even have that.

If printing money to buy Treasury bonds to subsidize an economy whose basic foundation is selling that debt overseas is not a capitulation, I don't know what is. I hope I'm wrong but don't think that I am.

[FRED]

Re: Yesterday Was the Capitulation of the US in the Global Economy

A couple of days ago I wrote an overly long analysis of how US government debt was the final bubble in our economy and how I was unsure as to how long that bubble might last before it bursts:

http://www.itulip.com/forums/showthread.php?t=8779

In light of yesterday's events, I can now confidently say that the answer is: "not long."

I read two things that shocked me yesterday, and the report of the Fed's actions was the second. Here was the first:

http://blogs.cfr.org/setser/2009/03/...ies-has-faded/

So there you have it. As I discussed in my long post above, the US's ability to survive in the global economy- our very economic model - is based upon the rest of the world recycling their dollars into the US economy by buying our debt. The $700 billion "stimulus package" might have some arguable merit if it managed to suck in gullible dollars from overseas- that would be some kind of sad and pathetic version of "competitiveness."

Instead, we don't even get that. Instead, the Fed announced yesterday that it was just going to print money to subsidize our deficit spending. Presumably most of the rest of the Treasuries will be bought domestically so that will just shuffle dollars around in a zero sum game. The US economy is now, as Denninger aptly characterizes it: a circle jerk.

http://market-ticker.denninger.net/a...-In-Mouth.html

In the commentaries I've seen about the Fed's actions, most people don't seem to get it. They look at the Fed's actions in a vacuum, just analyzing the effect it will have on mortgage rates and the housing market. It will probably help both of those, in the short term. However, few people seem to bother to look at this issue in the context of the global competitiveness of the US and what we have to offer as a player in the world economy. At the present time, that answer is: a printing press.

I will re-post the Federal Reserve's statistics about where foreign capital went in 2006 and where it went in the 4th quarter of 2008:

http://www.federalreserve.gov/releas...Current/z1.pdf

Under the heading “Net Acquisitions of Financial Assets” you will see that, in the year 2006, at the height of the credit bubble, the rest of the world acquired the following amount of US financial assets.

2006:

Treasury securities: 150.4 billion
Agency and GSE- backed securities: 222.7 billion
US corporate bonds: 541.0 billion
US corporate equities: 119 billion
Securities Repurchase Agreements (RPs) 109.4 billion


After the credit bubble burst last fall, here is where foreign dollars went:

2008 (4th Quarter)

Treasury securities: 1094.0 billion
Agency and GSE-backed securities: negative 1006.4 billion
US corporate bonds: 2.4 billion
US corporate equities: 18.1 billion
Securities repurchase agreements: negative 1273.1 billion

As you can see, in the 4th quarter of 2008 foreign money went stampeding out of private sector investment in the US, especially the security repo agreements that the big Wall Street banks use to finance their operations. But, I thought, at least an extra trillion dollars went into Treasury bonds, suggesting that the rest of the world still had faith in the creditworthiness of the US government. Well, in light of Setser's story linked above and the Fed's action yesterday, we don't even have that.

If printing money to buy Treasury bonds to subsidize an economy whose basic foundation is selling that debt overseas is not a capitulation, I don't know what is. I hope I'm wrong but don't think that I am.

Do a google search on any of the points you note above and you will find an iTulip article that predates any of the sources you site by anywhere from two to ten years.

For example:

site:itulip.com Net Acquisitions of Financial Assets

Denniger has been dead wrong for years. He has claimed, among other things, that the Fed will never, ever what the Fed did yesterday, which is to print money and buy long term Treasury bonds. We argued that they would.

Moved to Rant and Rave.

[*T*]

Re: Yesterday Was the Capitulation of the US in the Global Economy

Do a google search on any of the points you note above and you will find an iTulip article that predates any of the sources you site by anywhere from two to ten years.

For example:

site:itulip.com Net Acquisitions of Financial Assets

Denniger has been dead wrong for years. He has claimed, among other things, that the Fed will never, ever what the Fed did yesterday, which is to print money and buy long term Treasury bonds. We argued that they would.

Moved to Rant and Rave.

FRED, this is ridiculously harsh. So what if Denninger is a nut, the 'other sources' are iTulip, Setser and the Fed. Setser and the Fed are commenting on or providing contemporary data. We know iTulip's prediction record is good, that's part of the reason we're here. The other reason is that we discuss real events and data and update our priors in the light of these. This post is part of that process by a thoughtful contributor.
So why the big slap?

And yes, I think it was an important capitulation point.

& it's 'cite', not 'site'.

[Spartacus]

Re: Yesterday Was the Capitulation of the US in the Global Economy

& it's 'cite', not 'site'.

Fred's giving the exact fomat Google needs to find the cite on the site

he's not giving any actual single bibligraphical citation.

[ThePythonicCow]

Re: Yesterday Was the Capitulation of the US in the Global Economy

The US economy is now, as Denninger aptly characterizes it: a circle jerk.

http://market-ticker.denninger.net/a...-In-Mouth.html

I just happened on Karl Denninger's March 19, 2009 post Bernanke Inserts Gun In Mouth somewhere else, and found myself, by gut feeling, not by esteemed iTulip research and reasoning, sort of agreeing with Karl D's concluding recommendations:

Let me be succinct - it has been my considered belief that you need enough in liquid cash - not credit access in the form of credit card available balances or anything similar - for at least six to twelve months. I'm upping that here and now to twelve to twenty-four months - that's right - one to two full years of "minimum necessary to make it" expenses. Figure out right here and now what your minimum "monthly nut" is, and raise 12-24 months of that much in safe, liquid funds.

That is, Karl is of the no cash, no how, no way school of imminent and substantial deflation, as jobs, wages, tax revenues, dividends, social welfare payments, pension and retirement payments, home equity, asset prices, and what not evaporate. He expects inner cities to follow the example of Detroit - going "feral" as he puts it, with high unemployment and high crime. He figures that the Dollar will remain bad, but all other paper currencies will remain worse, and in any case, whether prices go up or down won't matter much if no one can buy.

Now it may well be that I'm just "talking my book" (as I am heavily in cash and removed from the inner city), or that I have been too receptive to Mish's good "deflation here and now" posts, but what Karl D is forecasting here, for the next year or two, seems partially correct to me.

However, I say "sort of" agreeing because I think Karl D's recommendations apply best to the last 12 months, not the next. Before the shelves go bare and the stores shut down, now is the time to stock up for a long economic winter. Now is the time to move from cash to the essentials of life, whatever you consider them to be.

In particular, and stepping past what Karl said above, we need to get past dollar (or even gold) denominated analysis and become more astute in analyzing the "real" value of things, in terms of what can actually feed, house and clothe us, and provide us with gainful means of employment that contribute to such real value.

Economists have spent a few too many centuries poring over charts always having one axis denominated in some currency unit. Yes, the light has been brighter under that lamp, but those lights, our modern financial systems and fiat currencies, are burning out.

I used to think that we could not have a "true" bubble in T-Bills or Dollars, because bubbles require viscosity and surface tension to form, and T-Bills and Dollars are the ultimate "liquid" asset. However they are becoming more viscous. T-Bills are freezing up, as China and other big buyers become more reluctant buyers. That is why the Fed is now desperate to inject liquidity into the Treasury market. Dollars will freeze up, perhaps with dramatic swiftness, once some big countries make major moves to alternative currencies for international trades. The temporary overlapping spikes in T-Bills and Dollars are not so much asset class bubbles as they are indicators of sharp reductions in the liquidity of these two most basic fluids of the global financial markets.

Whether dollar denominated prices jerk up or down when dollars become dramatically less liquid won't matter that much, because there will be serious shortages of both cash (or credit or income) as well as shortages of the stuff needed to substain anything like our current life styles, or any forseeably tolerable substitute thereto. Nothing to buy, and no money to buy it with.

I read with interest that rice and beans, in combination, provide an excellent source of complete protein. I must learn how to cook with them.