Darrell

The Troubles in Financials Are Not Over Yet

One has to remember that the debt explosion came about because foreign holders of the dollar were seeking a better return on their dollar holdings. They invested their excess dollars into treasury bills and were getting a negative return on their investment. Various types of sales people convinced them to invest their excess dollars in AAA rated debt securities.

These securities offered an inflation adjusted rate of return. Obviously no one understood these debt securities, as they lost value quickly,

Asset prices bubbled because of an excess dollar supply. Federal Reserve policy makers think they can deal with the problem by printing more money and making it available at low cost to the very institutions that created the debt problem.

The problem is that the process for selling this debt has changed and no longer is there buyers eagerly purchasing them. Also, the perception of the dollar’s value is slowly changing: when one exchanges their goods, services and/ or assets for dollars they are accepting a currency that is declining in value daily.

Investors are now entering into an uncharted financial storm caused by the following events:
1. dollar’s decline in value;
2. the potential difficulty in selling new debt securities;
3. The long unwinding of existing debt securities, with the realization that much of the AAA rated debt may be worthless.

It remains to be seen what the consequence of creating an excess money supply will have on the global economy, but my thesis is that the global economy will, in the end, demand that we put controls on our money supply. Or else.

And this is why I am spending May 08 in Ireland.