The Treasury auctions this week are on everyone's minds. This week will see $100 Billion in Treasury issue, and approximately $1 Trillion or so in total issue between now and September (calendar check: it's late May now). So where will this money come from?
In this interview, Paul Krugman says we're going to save it ourselves:
One way to think about the global crisis is a vast excess of desired savings over willing investment. We have a global savings glut. Another way to say it is we have a global shortage of demand. Those are equivalent ways of saying the same thing. So we have this global savings glut, which is why there is, in fact, no upward pressure on interest rates. There are more savings than we know what to do with. If we ask the question "Where will the savings come from to finance the large US government deficits?," the answer is "From ourselves." The Chinese are not contributing at all.
Yes, the US's domestic savings rate finally went positive, but I don't see how it's going to be enough to come up with a trillion dollars in the next four months, especially when during the best of times we couldn't internally finance a measly few hundred billion in an entire year. Plus, I really don't see how unemployed families cutting back on demand translates into their ability to create a savings glut.
So where will the money come from for this week's $100 Billion in Treasury issue? There are several possibilities, but before I list them I remind one and all to remember that Ben has some room to play with. After all, the 10-year Treasury bond rate has been at lows not seen since the 1950's, driven there by Ben himself. Now there's a growing sense that the irresistable force is about to meet the immovable object, but my gut tells me "not yet". My list:
- Crash the stock market and scare money into Treasuries.
- Print, buy MBS (and overpay), and tell the now-government banks to use the proceeds to buy Treasuries for their own accounts, boosting the banks' balance sheets. By the way, none of you really believe the private Fed is going to realize any losses on any of this junk, do you?
- Conduct an announcement, coordinated with G-20 central banks, of another round of monetization. An ECB monetization / rate reduction is being talked up right now. These coordinated announcements crush all currencies (except gold) equally and are an attempt to trap capital by giving it no safe haven.
The game is far from over IMO. As markets occasionally work up to emotional crescendos, expect any one or a combination of these options to be implemented as the need arises. The market manipulators are playing with your emotions, talking you up and down, in and out. The cycles will be repeated as often as possible / necessary. They know exactly what they're going to do next (as do people on the "friends and family plan"), and you don't. Emotionally exhausted investors and traders make mistakes, get caught offside and have their money stolen by insiders. My first SA article, from November 2008, started this way:
It should be obvious that it’s in the best interests of the monetary authorities (central banks et al) to create a muddy picture with respect to inflationary vs. deflationary expectations. Were they to allow it to become obvious that deflation is unavoidably coming, everyone would place the appropriate bets and deflation would be self-fulfilling. The same is true of inflation. Confusion reigns supreme, and this fact is, in my opinion, no accident. It is as it must be. Mixed signals, unclear information, even confusing policy responses can be seen as dezinformatsia.
My advice: step off the roller coaster, find a defensive investment strategy that won't keep you awake at night, throw a jumbo popcorn in the microwave, and enjoy the show. The markets, like politics, are nothing more than theater. I am 51 and I hope I will live to see a day when investing becomes investing again.
Disclosure: The author is not a financial professional. Please do your own due diligence. The author is roughly 50% cash / 50% dollar short instruments such as precious metals, TBT, etc.
