Wednesday, February 09, 2011

How Thin is the Ice?

EUR/USD 1.3672 Hi 1.3681 Low 1.3610
USD/JPY 82.43 Hi 82.66 Low 82.24
AUD/USD 1.0107 Hi 1.0151 Low 1.0091
EUR/JPY 112.72 Hi 112.80 Low 112.06

Well the narrative remains cool, calm, collected. We had that, you know, crisis thing but well, we threw a lot of (taxpayer) money at it and now things are coming along. Signs of economic recovery are everywhere, not least in the steady upward rise in U.S. Treasury Bond yields. Which is great. Really. Because it means that this Quantatitive Easing thing is working because, er, obviously now confidence is back and these, er, previously low long term rates have maybe fostered confidence and encouraged, er, borrowing and lending and all that groovy stuff that keeps the economy ticking over. You can tell this because er, U.S. Bond Yields are rising and this is a sign of confidence. QE was meant to get Bond Yields higher, right? Oh maybe not, but it doesn't matter, now that they are higher then we better figure out a way to explain why this really is a good thing and nothing to worry about. So higher Bond Yields means one thing and one thing only: a stronger economy. OK?

I like this as a narrative because it's the best that can reasonably be done with some pretty scary data.

Somehow, somewhere during this new era in global economic history the U.S. lost the foreign investor. You know all those nice, friendly, naive foreigners who believed the spiel about the USD being an international reserve currency and the safest place to put your money and blah, blah, blah. If you want proof then just follow this link, scroll down the page and click on Quarterly Analysis and Charts. That takes you to a nice little table which gives you some pretty scary numbers.

Something is up.

The U.S. Federal Reserve has been buying U.S. Treasuries like crazy over the past few months.
So much so that according to the most recent data while China holds $896bn and Japan owns $877bn of U.S. Government debt, “By June [the Fed] will have accumulated some $1,600bn of Treasury securities". But the mad rush by the Fed to buy more Treasuries than, gulp, Japan and China combined, has failed to keep U.S. Bond Yields from rising. That is: all that Fed buying has failed to keep the U.S. Government Bond market from selling off. Net selling doesn't appear to be a flood quite yet but buyers have pretty much disappeared altogether and the U.S. Government keeps issuing paper.

But what does it mean?

Here's a clue: if you have been living off the largesse of someone else (read foreign investors) and if that someone else turns off the money tap (for whatever reason) then your standard of living is likely fall. How far and how fast it falls depends on how dependent you came to be on the money flow.

Right now the U.S. is going with the idea that it doesn't matter if foreign investors have turned off the money tap because all the FED has to do is print money. This is the Weimer Republic approach to money management. It's not like it hasn't been tried before. It's just that it doesn't work.

The next stage in this fabulous strategy is to send buckets of money to people in the post. I mean why bother doing anything at all if you can just print money? Why work? Why produce? Why save? Why invest? Why have an economy at all? All you need is a printing press and all your problems are solved.

Which is true actually if you can get foreigners, who are still working and producing, to hand over their goods in exchange for what you have been printing up willy nilly. And it worked pretty well for a while. But the game is up. Foreigners don't seem quite so happy to play the game any more.

Meanwhile with Helicopter Ben in charge back at the Fed, a surreal episode of the Hitchhikers Guide to the Galaxy is unfolding before our very eyes.

OIL 87.22
GOLD 1,363.10

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