Spiga

The US may need the IMF

There is so much bearish data coming out, i'm inclined to retract my previous statement that we may have made the low for the year (by a 50% chance). It seems that now entire governments (including our own) are having a hard time raising cash. Dejure revisits De facto...

Asian, Mideast, and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

The share of foreign buyers ("indirect bidders") plummeted to 5.8 percent, from an average 25 percent over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.

The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60 percent of the $11,000 billion market for US home loans.

With the "financial accelerator" kicking into top gear -- downwards -- we may need everything Ben Bernanke can offer.

We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.

Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?

As The Wall Street Journal wrote this weekend, the entire country is facing a "margin call." The US has come to depend on $800 billion inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.

As of June 2007, foreigners owned $6,007 billion of long-term US debt. (Equal to 66 percent of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?

The Chinese have quickened the pace of yuan appreciation to choke off 8.7 percent inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states -- overheating wildly -- are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.

The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6 percent in a year. The greenback is nearing parity with the Swiss franc -- shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350 million in revenues for every one-yen move. That is an $8.75 billion hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.

Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400 billion trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.

It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies." The monetary order is becoming unhinged. (never doubted Dr. Ron Paul)

Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of the European Monetary Union, Italy failed to sell a full batch of state bonds.


These are indeed historic times

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