phdinsuntanning

Reverse Carry Trade Borrowing Proves Deadly

Dear Edward, I guess you have some confussion about reverse financial speculations. The US Federal Reserve has been moving away from the risky USTB (US treasury bonds) in great style with the currency swap operations, and now only ¼ of US Fed holdings are in US government debt. A brilliant US move as foreign demand for US treasury bonds (USTB) has declined in the last six months, so all the risk of the US fiscal and monetary imbalance of the US dollar has been transferred to non US
central banks, banks and other bond holders from Brazil to Korea, including Singapore.

In Europe the governments are rescuing the money of deposits in failed banks, with large injections of equity into their financial systems. To finance these rescues, the governments are selling bonds to their local central banks that are under the control of the European Central Bank, which creates money to buy those bonds, so large deficits are being built. As the credit intermediation activity is paralyzed by the lack of trust between the banks, the increase in the ECB monetary base by the new debt emissions has not been inflationary (and gold prices noted that).

The most competitive financial systems of Germany, France, Netherlands, Belgium, probably will start to create credit soon as the
rates are returning to normal, maybe this week. Less competitive and “highly leveraged” consumers and construction firms
in Spain, Portugal, Greece will need to be refinanced.

The EU common monetary policy will face a hard option soon: to print more euros to buy all the EU bonds (inflation) or to establish
some discipline (deep recessions for some members and shallow recessions for others ). An unavoidable decision for the ECB that
probably will be taken in the next days. If the criteria is to minimize the European inflation I don’t see any option but a mayor adjustment
in the member countries with more risky government bonds.

At the end of the day, the FED transformed a monetary problem in a fiscal restriction, and the same can be in the US, any public spending initiative will be hardly funded, not a good time for love promises.

have a nice day...