Team Obama's Charm Offensive

This week, Team Obama took their dog and pony show on the road. Treasury Secretary Geithner went to China, Fed Chairman Bernanke to Capitol Hill, and the President himself began a Mideast tour in Saudi Arabia. This full-court press is not coincidental, and comes just as the federal government has begun unloading trillions of dollars in new Treasury obligations. The coordinated charm offensive is meant to assure the world-at-large that the United States can repay these obligations without destroying the dollar.

Given the renewed weakness in the dollar and the recent expressions of concern from China, our largest creditor, about the safety of its current holdings, this is no easy sell. Not only must our leaders convince holders of our debt not to sell what they already own, but to back up the truck and buy a whole lot more. The hope is that a dream team consisting of a charismatic politician, a skilled Wall Street banker with longstanding ties to China, and a respected Fed Chairman, can close the deal. However, no matter how slick the sales pitch, no amount of lipstick can dress up this pig.

The most obvious fear the trio must address is that oversized deficits will persist indefinitely. Reading from a carefully scripted rebuttal book, all three proclaim that as soon as the stimulus revives our economy, the government will take all necessary steps to reign in the deficits that result. Bernanke's testimony showcases this rhetorical shift. The Fed Chairman claimed that catastrophe has been averted and that the recession is nearly over. As a result, he advised Congress to now focus on debt management. How he expects them to do that was left unexamined.

Setting aside the fact that the recession is far from over and that the stimulus will actually weaken the economy in the long run, Bernanke's words were less a practical guide to Congress than a bromide for our foreign creditors. Meanwhile, Obama carefully peppers his speeches with calls for Americans to live within their means, to save more and spend less, to produce more and consume less. But nothing in the government's current fiscal or monetary policy will encourage such behavior. In fact, the objective of economic stimulus is to prevent such changes from taking place!

The laughter of Chinese students that greeted Secretary Geithner at Peking University shows how ridiculous this spiel sounds overseas. Actions speak louder than words, and the actions of the current Administration are deafening. Multi-trillion dollar deficits, bailouts, nationalizations, quantitative easing, and grandiose plans for government-provided healthcare, education, and alternative energy, render all their claims of future prudence meaningless. If our leaders will not make tough choices now, why should anyone believe they will do so later when those choices will be even harder to make?

Of course, it's not just major holders, like China and Saudi Arabia, that need to be convinced. Since the largest holders are already in so deep, they have the greatest short-term incentive to play ball. While throwing good money after bad is certainly a lousy investment strategy, it is politically expedient as it delays the need to officially acknowledge losses. The spin is designed to keep all the smaller, more nimble holders from dumping their Treasuries. The major holders can publicly pledge their commitment to Treasuries, while they privately planning their exit strategies, as long as they feel that the smaller holders won't spook the market by front-running their trades.

However, once the psychology turns, there is no way to stop the rush for the exits. Remember how quickly the secondary market for subprime mortgages collapsed? One day, investors were lining up to buy; the next day, the stuff couldn't be given away. Make no mistake about it, we are issuing subprime paper and no amount of political spin can alter that reality. Bogus credit ratings aside, I think the world already knows this and it's just a matter of time before someone admits it.

In the meantime, by continuing to lend, our creditors merely supply us the shovels to dig ourselves into an even deeper economic hole. Their credit enables our government to grow when it needs to shrink, finances bailouts of companies that should be allowed to fail, and enables a nation that should be saving and producing to continue borrowing and spending. As a result, the more money the world loans us, the less capable we are of paying it back. I really wish the world would stop doing us favors, as neither party can afford the consequences.

For an timely example, just look at California. With an unmanageable $20 billion deficit, California recently asked Washington for a bailout. With none immediately forthcoming, California was forced to make real and needed budget cuts. The hard choices, which will benefit California in the long run, would not have been made if federal funds had been committed. We all should be so lucky.

Comments

[ebworthen:]

California has always been a trendsetter.

Taxpayers said "no" but the people with their hands are still being told "yes".

Typical. We are doing the same as a nation. Punishing and taxing the responsible, rewarding the crooked and lazy.

Sooner or later....it will pop.


On Jun 07 03:57 PM bbowen7 wrote:

> Peter had me until the comment on California. The principle is right,
> but it is way too early to claim that the people and politicians
> of California have seen the error of their ways. We're still voting
> for 10 billion dollar bonds for "fast trains" that few will ride,
> auto emission standards tighter than the rest of the country, mandatory
> "green energy", and public employee union retirement programs at
> 90% of wages after 25 years. Here in San Francisco, there is a big
> hoopla about cutting $400 million from the mayor's budget - leaving
> it 1.1% above last year.

Jun 07 04:24 PM

[ron_paulite:]

Another excellent article!

Peter, we need you in Congress or the White House!

When asked about increasing government spending in a recession, Ron Paul's reply hit the nail on the head. Whether you agree with Keynesian economics or not, it is OKAY to increase government spending to build roads and bridges to stimulate the economy during a recession -- PROVIDED the government HAS the money like what the Chinese government is doing now. It is another matter although if you are already deep in debt and have to borrow more money to spend.

Jun 07 04:32 PM

[Northstar10000:]

Questions--
Is the Obomanator a brilliant marxist who knows exactly what he is doing.
Is the Obomanator so anti american that he knows how to simply destroy the country by any means necessary.
Is he a complete economic fool and really believes this insanity will work.

Jun 07 05:52 PM

[Fighting Yoda:]

Also California unions are taking the matter of pension preservation -of bankrupt towns - to the courts, and some new legislation also is in the works. The situation is similar to auto pensions and AIG bonuses- get a contract approved - get taxpayers to pay in bankruptcy.

But with Obama socialism anything goes.

On Jun 07 03:57 PM bbowen7 wrote:

> Peter had me until the comment on California. The principle is right,
> but it is way too early to claim that the people and politicians
> of California have seen the error of their ways. We're still voting
> for 10 billion dollar bonds for "fast trains" that few will ride,
> auto emission standards tighter than the rest of the country, mandatory
> "green energy", and public employee union retirement programs at
> 90% of wages after 25 years. Here in San Francisco, there is a big
> hoopla about cutting $400 million from the mayor's budget - leaving
> it 1.1% above last year.

Jun 07 06:10 PM

[Robert Nabloid:]

I truly believe that he is clueless about economics. Consider his beliefs about socialism... and the people he chose to be his advisers and to head the Treasury... all people that have failed miserably at something and are then expected to fix the mess they helped create. "Brilliant choice" and "dream team" is how the media describe this group of failures...

I believe he just wanted power and to make history. He was power hungry and he is now worshipped. This is the same guy that sued Citibank to FORCE them to loan MORE sub-prime to a certain ethnic community... Then when sub-prime blows up, blames the banks for making sub-prime loans. Yes, he actually SUED Citibank... MSM didn't cover that in detail...

He is a politician. Not an economist or a economic/long-term strategist. A politician. He makes promises and stands on a podium and makes big speeches. That is his job - to make people like him and vote for him. Nothing more, nothing less. Same as any President. It's just a big popularity contest and has nothing to do with the long-term success of the country. But he does have his own goals and ambitions for a more socialist America... that is obvious. Only thing is, he thinks it's a good thing and doesn't see the contradictions in the values and economic outcomes of each.

Show me a socialist country where the wealth is more evenly spread amongst everyone than capitalist America... The rich are super rich and the rest are super poor in socialist countries. At least in US we have a middle class and the wealth is spread around MUCH better... No, it's definitely not perfect, but show me a system that is better at it where things are fair based off of "you reap what you sow".

On Jun 07 05:52 PM Northstar10000 wrote:

> Questions--
> Is the Obomanator a brilliant marxist who knows exactly what he
> is doing.
> Is the Obomanator so anti american that he knows how to simply destroy
> the country by any means necessary.
> Is he a complete economic fool and really believes this insanity
> will work.

Jun 07 06:17 PM

[YoYoMama:]

The political stupidity of the American populace never ceases to amaze me.

It's a willful stupidity that comes from not knowing is truly right from what is truly wrong (and not wanting to know). From not determining a core set of values that governs one's life and affects all one's decisions. From not understanding that every action on one's part indeed affects my neighbors and the world at large. From a selfishness that says I will only vote based on what's best for me.

From not understanding that my one vote is truly powerful and can cast the lot for an entire nation.

When we as individuals, and as a nation, begin to act with moral integrity, we will begin to vote for candidates not based on what "feels good", but what we believe. We'll ask more of our leaders, and get the right leaders into office in the first place.

But as long as we embrace moral ambiguity, we'll continue to elect leaders based on their TV appeal and not their substance. How could we do otherwise when we have no inner substance ourselves?

RE:
Obama carefully peppers his speeches with calls for Americans to live within their means, to save more and spend less, to produce more and consume less. But nothing in the government's current fiscal or monetary policy will encourage such behavior. In fact, the objective of economic stimulus is to prevent such changes from taking place!

Actions speak louder than words, and the actions of the current Administration are deafening. Multi-trillion dollar deficits, bailouts, nationalizations, quantitative easing, and grandiose plans for government-provided healthcare, education, and alternative energy, render all their claims of future prudence meaningless. If our leaders will not make tough choices now, why should anyone believe they will do so later when those choices will be even harder to make?

Jun 07 06:46 PM

[Boot:]

Charm is all we (US citizens) can afford right now. Political capital is stretched to a 'laughing point." The taxpayer money is spent, I doubt our grandchildren will know world without deficits. I don't think our general populace lacks values or vision. However, once put into office, these very same citizens become clouded with the collective history of their predecessors, and the manipulation of private interests that would steer the ship. That machine serves only itself, not the US nor any other country. We the people get the bill all the same. Hope my grandkids like spam, I doubt they will know what a steak tastes like.

Jun 07 07:25 PM

[conceptwizard:]

Our treasury department woefully short of revenues has the privately owned Federal Reserve monetizing sovereign debt because they cannot sell it all, some $300 billion in Treasuries and $750 billion in Agency debt as the Fed monetizes an additional $1.5 trillion in bank owned CDOs, collateralized debt obligations, so as to remove them from bank balance sheets so they can purchase Treasuries to compete the daisy chain of fraud. Ten-year Treasury note yields as a result have traded up to 3.84% from 2.35% just five months ago. Foreigners are sellers as an avalanche of Treasuries hit the street. The demand for Treasury funds over the next few years will be colossal. If government raises taxes the economy will fall further. The Fed could monetize $2.5 and $4 trillion in Treasuries and other toxic waste by the end of the calendar year. Incidentally, there is not a remote chance that the Fed will ever be able to withdraw funds from the system and every professional has to know that. The result is a collapsing dollar and higher gold and silver prices in anticipation of higher inflation. This year the dollar could easily break 71.18 on the USDX, the dollar index, versus six major weighted currencies. That would again cause, as it did from 11/07 to 6/08, countries and foreign businesses to reject taking dollars in trade. Such an event can easily happen. Propaganda and smoke and mirrors won’t work this time.

Jun 07 08:12 PM

[carey_jim:]

The alternative to another collapsed super power is even worse for China and the rest of the world, and that is why they will support the United States 'till (economic) death do us part.'

I hoped that that the bald headed guy would beat Obama. Then, the Republicans would have been forced to take responsibility for this mess, but it didn't happen.

A Democrat team would then have had four years to watch the economic meltdown and think about solutions.

Extraordinary times produce extraordinary politicians. The 1930's produced Stalin, Hitler, de Gaulle, Churchill and Roosevelt. But history demonstrates that it was extraordinarily difficult for the average man to tell them apart.

We are headed for difficult economic times. I only wish the arrogant barking of the know it all crowd could be turned into thinking. It is impossible to stake a claim on all of economics with a single group of concepts. Marxism should have taught us that.

But history shows that asking human beings to respect the boundary of their ignorance and the limitations of their thinking, is asking too much.

Jun 08 01:19 AM

[htex:]

Our President (and his minions) are going all over the world accepting responsibility for every "bad" thing that has happened in the past; "bad" being redefined to ignore the realities that existed when the alleged "terrible" decisions were made. However, he and his team cannot take responsibility for the fact that they have treated the current world economic problems like a game. They are enjoying playing tricks on their drunken friend just before he passes out. They think they can then wake him up at will and he won't remember anything and all will be better. Instead of circumspectly focusing on our most important problem (profligate spending based upon debt...personal, corporate, municipal, county, state and federal...and some churches and charities), they don't want to "waste a good crisis." Jimmah Carter's micro management disaster will be nothing compared to these guys. Their arrogance knows no bounds as they will fix us, the system we live under and the world. Good luck if you are a producer. All this "fixin" is "fixin" to land on your back.

Jun 08 10:15 AM

[aldousd:]

They are not actually voting what is 'best for them' if they are only thinking about getting free stuff from the government. That may seem to be best for them, but if it continues to enable the bankrupting (using the term wrongly) our country, and enabling our leaders to claim they're heros for having done it, then they are most certainly not voting for things in their own best interest. Your own best interest is to survive, and that includes longer than today and tomorrow. The truth is we need MORE people to think about their own best interest, and less to worry about who is going to look after their interests for them.


On Jun 07 06:46 PM YoYoMama wrote:

> The political stupidity of the American populace never ceases to
> amaze me.
>
> It's a willful stupidity that comes from not knowing is truly right
> from what is truly wrong (and not wanting to know). From not determining
> a core set of values that governs one's life and affects all one's
> decisions. From not understanding that every action on one's part
> indeed affects my neighbors and the world at large. From a selfishness
> that says I will only vote based on what's best for me.
>
> From not understanding that my one vote is truly powerful and can
> cast the lot for an entire nation.
>
> When we as individuals, and as a nation, begin to act with moral
> integrity, we will begin to vote for candidates not based on what
> "feels good", but what we believe. We'll ask more of our leaders,
> and get the right leaders into office in the first place.
>
> But as long as we embrace moral ambiguity, we'll continue to elect
> leaders based on their TV appeal and not their substance. How could
> we do otherwise when we have no inner substance ourselves?
>
> RE:
> Obama carefully peppers his speeches with calls for Americans to
> live within their means, to save more and spend less, to produce
> more and consume less. But nothing in the government's current fiscal
> or monetary policy will encourage such behavior. In fact, the objective
> of economic stimulus is to prevent such changes from taking place!
>
>
> Actions speak louder than words, and the actions of the current Administration
> are deafening. Multi-trillion dollar deficits, bailouts, nationalizations,
> quantitative easing, and grandiose plans for government-provided
> healthcare, education, and alternative energy, render all their claims
> of future prudence meaningless. If our leaders will not make tough
> choices now, why should anyone believe they will do so later when
> those choices will be even harder to make?

Jun 08 11:16 AM

[Chickenpookie:]

Peter, Tell us what the big boys are buying!

What I think I see:
China prints money to buy fresh Federal Reserve notes, takes these notes and buys commodities + Treasuries + who knows what. What besides underwater MBS's and Treasury notes is the FED buying?

Jun 08 02:39 PM

[John Galt:]

So the solution to the crisis is to give more money to the people partially responsible for the crisis ( and didn't see it coming)... let them try and print money and inflate another bubble...

After they inflate us with a bubble we will then we trust them to " take away the punch bowl when the party gets good". Now what on earth would make us think that experiment would work? These are the same guys that denied there was a housing bubble, denied the financials were in trouble, and denied we were in a recession until the Great Depression 2 landed on our doorstep. These guys are paid to look at the data, they are at liberty to speak with the CEOs of major companies and have access to data that you and I don't have.

I had rockheads at the gym talking about how we were in a huge real estate bubble, but the PHD Princeton economist setting the government interest rates couldn't see that?

If Bernake was such a student of the great depression, he would know that what they want to do was more or less tried, and in 1938 when they tried to increase the reserve requirement ( because they didn't want an inflation avalanche like the German Weinmar to come and because they were trying to take away the punch bowl when the party was good) led to another recession inside the Great Depression.

Oh well, don't get angry. History doesn't repeat itself, green shoots green shoots lalalallalallalala. It seems like 99% of the people on Seeking Alpha see that there is a problem, now if the rest of the population would turn off American idol and try and become a little bit financially literate, they'd see that there is a problem here.

Jun 08 11:22 PM

[thevoice@vo...:]

Anyone know the ticker to short treasuries?

Jun 09 08:26 AM

[sticktoitiv...:]

Indeed, Thevoice

(TBT) ProShares Ultra Short Lehman 20+ Year Treasury Bond Fund
(PST) ProShares Ultra Short Lehman 7-10 Year Treasury Bond Fund

However I would rather you buy a small number of puts on some of the worse financials. Treasury yields are likely to push LIBOR higher, hurting financials. Small amounts of puts will leverage your upside while limiting the downside to what little you invest. Personally I am in the process of considering a similar trade on acas.

Jun 09 01:34 PM

[sticktoitiv...:]

By the way, I don't take liability for trades you make.

Jun 09 02:18 PM

[cbc:]

thanks Peter for seeing truth and doing your best to get it out there for the sheep. I hope you never have to run for government office like the previous poster suggested. You must be WAYY to smart for that.

Jun 10 03:20 PM

[JPPennypacker:]

Enjoyed your interview on the Daily Show with Jon Stewart. I hope that if you decide to run that you do get elected to the senate in Connecticut and send Mr. Dodd home for his long overdue retirement. Maybe he could spend more quality time with his friend Angelo.

Jun 11 09:59 AM

[Northstar10000:]

Sorry to burst your bubble but California has made no tough choices.
They voted for them but the pols in State government have managed to yet pull a rabbit out of the hat with smoke and mirrors. sorry nothing has changed and may not until there is a complete implosion in the State. Never underestimate how the pols can play tricks.

Jun 16 12:27 AM

[roywil:]

ATTN yellowhoard:

Here is a statistic for you:
66,882,230

Maybe you should have written:
"We're not *ALL* fools Mr. President."


On Jun 07 08:33 AM yellowhoard wrote:>
> We're not fools Mr. President.<

Jul 12 07:55 PM