Saturday, October 26, 2013

Treasuries Market Concerns





The strategic situation globally is poorly understood by most.  The west has established a defacto border with all maritime states that begins on their doorstep not ours.  It was first established by British naval power, partially challenged by Japan and overwhelmingly reasserted by the USA Navy and its allies.  The truth is it serves none to change this much at all.  For this reason the USA maintains the one fleet in force as an overwhelming counter to anyone’s ambitions and the building program needed to challenge this requires decades of effort while telling the world one’s intentions and allowing a counter alliance to arise.

Obviously the Chinese military is chaffing at this particular arrangement and needs to be pacified somewhat and somehow. 

What is a problem is that management of the exploitation of the sea has become a mutual need for all countries and needs to be properly addressed.  Perhaps this is where the Chinese can make serious and welcome progress.

In the meantime, our global financial system has suffered a number of attacks on general confidence.  The shifting about on oceans of treasuries has been challenging to the Chinese and for that matter everyone as they contemplate irrationality taking charge in Washington.

Beijing’s Race to Diversify out of US Treasuries: New Agreements would Allow Singapore to become “Leading Offshore Trading Centre” for the Chinese Yuan

Global Research, October 22, 2013


China is accelerating the role of the Chinese Yuan with agreements with Singapore that would allow “direct trading between each other’s currency” according to Singapore’s central bank. The Agence-France Presse (AFP) reported that China and Singapore will cooperate on a number of agreements that would boost economic ties for both countries.

China is concerned with its US treasury holdings worth up to $1.2 trillion after Washington’s spectacle earlier this month over its fiscal policies that pushed the world’s economy into a crises.  “The move, along with other agreements on financial cooperation, is expected to bolster Singapore’s status as a leading offshore trading centre for the Chinese Yuan, officially called the renminbi (RMB)”the report said.  “China and Singapore will introduce direct currency trading between the Chinese yuan and Singapore dollar,” the Monetary Authority of Singapore (MAS) said in a statement, adding that details will be announced separately.” China is in a good position because it allows Singapore to invest in Chinese stocks and bonds with Yuan’s boosting its capital markets.

The report said that “China will also grant Singapore-based investors a 50-billion-yuan ($8.2 billion) investment quota under its Renminbi Qualified Foreign Institutional Investor programme, MAS said.  This would allow investors based in the city-state to use the Yuan to invest in Chinese stocks and bonds.”  China is racing against time in case lawmakers in Washington do not come up with an agreement to raise the “Debt Ceiling” to borrow more money or solve their economic problems.  China is diversifying out of US Dollars at a rapid pace since the 2007-2008 financial crises that resulted in the bankruptcy of major financial institutions, bailouts and government takeovers such as Lehman Brothers, Fannie Mae, Freddie Mac, Citigroup and American Insurance Group (AIG).  China is also frustrated with the US government’s backing of its neighbors internal affairs with Beijing regarding the South China Sea.  Reuters reported on October 10th, 2013 the following:

The US is also aggressively backing the Philippine government’s maritime dispute with China when U.S. Secretary of State John Kerry angered China’s leadership “All claimants have a responsibility to clarify and align their claims with international law. They can engage in arbitration and other means of peaceful negotiation,” Kerry told leaders at the East Asia Summit in Brunei, including Chinese Premier Li Keqiang.  “Freedom of navigation and overflight is a linchpin of security in the Pacific,” he added.

It is important to note that Hillary Clinton, who is rumored to run as a Democratic candidate in the 2016 US Presidential elections, told an ASEAN summit in 2010 that the US had a “national interest” in the “freedom of navigation. “  Clinton also angered China that only proves that the US is directly intervening in a regional dispute.  Since the Obama administration got into office they have repeatedly used the ASEAN forums for multilateral discussions between China and its South East Asian counterparts supporting the opposition and ignoring Beijing’s call to settle the disputes bilaterally. The US has supported the Philippines (considered a US puppet state) and Vietnam to counter China’s claims aggressively resulting in numerous maritime incidents in the South China Sea and has divided all countries within ASEAN.  China is threatened economically and militarily by the US government (See graph below).

China is making moves to loosen the US government’s strangle hold over its economy and its regional disputes with its neighbors.  China’s economic growth will benefit Singapore in the long run as “Chinese institutional investors will also be allowed to use the Yuan to invest in Singapore’s capital markets.”  The AFP also stated that “Relevant agencies in Singapore and China are also in discussions to facilitate China-incorporated companies, which have received regulatory approval to list directly in Singapore.” And that “The new initiatives will further promote the international use of the Renminbi through Singapore,” the MAS said.  

Times are changing for the world’s economy.  China and other countries are in preparation for a possible US default in the future.  When can the US Dollar collapse?  It is hard to tell since the US economy is intertwined with the global economy.  But one thing is for sure China and other countries across the planet are diversifying out of the US Dollar and it is accelerating.  That is a fact.  Singapore is not taking any chances either.  “Its managing director Ravi Menon added: “Financial ties between the two countries have deepened considerably and Singapore is well placed to promote greater use of the RMB in international trade and investment in the years to come.”  

The AFP report said “China’s rise as the world’s second biggest economy has seen the Yuan take on a bigger role in international financial markets.”  2014 will be an interesting year for world financial markets.  What will happen when Washington is once again on the center stage in January?  Will they continue to increase the “Debt Ceiling” so that they can borrow until the end of time? Or will they play “Political Brinkmanship again?  Will the Federal Reserve Bank “Taper” its monetary policy by Mid-2014 if the US economy improves as Chairman Ben Bernanke promised or will the new Chairwoman Janet Yellen, a member of the Council on Foreign Relations (CFR) and a protégé of Alan Greenspan continue to print US “Fiat” currencies with low interest rates?  Many questions on the US economy remain elusive.  China has many reasons to worry about its financial future and its sovereignty and that is a declining empire called the United States government.

Checkmate – Game Over
Posted by STAFF - Matheus on October 9, 2013


Financial analyst Dr. Jim Willie says forget about the government shutdown and the debt ceiling. The Treasury market is the big problem. Dr. Willie says, “What’s going on with the Treasury bond market right now is systems are breaking . . . they broke the interest rate swaps. They are not functioning anymore. . . . Foreigners are dumping Treasuries.” The cost of insuring one-year U.S. bonds against default has quintupled since Sept. 23, according to data from Markit, a financial information company.

Translation – the Federal Reserve, the United States government and New York’s biggest banks are boxed into a corner with a horde of financial vipers closing in on every side. What this means is that no matter what the congress and Obama decide its “game over”. The problem is that everyone is going to join in on a selling spree of worthless paper only to find out that the paper is indeed worthless.

Who is going to buy the bonds that are now being dumped? Its only paper backed by the good faith of the United States, which unfortunately has not acted in good faith when in league with corrupt activities on Wall Street, which Washington made legal—a total betrayal of not only American people but also the peoples of the entire globe. What happens to the value of something when there are no buyers and only sellers?

Dr. Willie speculates about the meeting last week of all the big bankers at the White House saying, “I think it was an emergency meeting because they cannot successfully defend the dollar anymore, not fend off the big Treasury bond sales. Reversal in the Treasury bond market could be a deathblow for these zombie New York banks. These big banks are in danger of imploding. I do not think the Fed is going to taper its bond buying. I believe they are going to double it.”

A U.S. government default will be an economic calamity like none the world has ever seen. Failure by the world’s largest borrower to pay its debt — unprecedented in modern history — will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression.

U.S. budgetary uncertainty is breeding a cloud of fear over global financial markets, the damage of increased risk to markets is already being sown. In such a climate of uncertainty, the psychological maelstrom of fear can build to create a herd-like response with everyone running for the exits at once.

“If they seriously default on the debt, what we’re really talking about is a depression,” says veteran financial sector analyst Richard Bove, VP of research at Rafferty Capital Markets. In a news video, he explains how the fallout would be a lot worse than the recession suffered in 2008 and the aftershocks would be felt for at least a decade.

The U.S. Treasury Department itself is worried reporting, “A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

Pathetic to have had to listen to the Federal Reserve hint about tapering when they have been under accelerating pressure to buy more because they are the only one left to buy the debt and fund (with funny money created out of thin air) the insane American budget. It is guns or butter after all (basic economics) meaning the United States just cannot afford all its aircraft carriers. The generals have miscalculated building a military establishment that the country nor the world can afford.

Already the situation is morphing quickly with market mechanisms threatening seizure. We keep hearing about the vulnerabilities of the Repo market and all markets dependent on the American dollar and specifically on the value of 10 year. treasury notes for value, all could be ripped asunder from one day to the next.

The winds have changed. Owners of United States treasury bonds are not feeling secure holding mountains of paper that are being threatened with a dramatic loss of value. A plunge in Treasuries would also devalue the dollar, which would instantly make everything we buy more expensive, and in turn destabilize countries and economies all over the world.

Political Rebellion
In America we see a potential rebellion taking place in the Republican Party, which could itself splinter in half if the most conservative elements are not heard. But let’s assume the best case scenario. Next week they raise the debt limit. Then what?

The same thing is going to happen but perhaps a few weeks or months later! The inevitable has arrived. If they pass the bill to raise the ceiling who then is going to buy the bonds to pay for continued bloated spending? Investors and sovereign governments are selling bonds and then the Treasury will begin selling bonds if the ceiling is raised. Who is going to buy them?

When the Fed stands naked in full light seen for what it is and for what it now has to do there will be hell to pay. They have not invented the movie script to describe what will happen to the world’s civilization when the dollar collapses. The American and entire first world and third world with it will be faced with a depression or outright collapse when nothing will work because currencies and banks will fail along with everything else.

“Now you’ve got not only the budget but the debt ceiling and time is running out and everybody knows it, including (the politicians),” said Terry Morris, senior vice president and senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania. “The longer this goes on, the more the uncertainty, the closer the deadline and the more nervous investors are going to be.”

Conclusion

You can forget about any default in the debt-ceiling crisis.  Former Assistant Treasury Secretary Dr. Paul Craig Roberts says, “The debt ceiling will be raised.  No government wants to lose its power or lose its ability to borrow.  So, if they don’t raise the debt ceiling, it is just a way of Washington committing hari-kari.  It simply removes the United States as a super power.”  Dr. Roberts goes on to say, “If they don’t make a deal, one of two things will happen. . . . The Federal Reserve, on its own authority, lends the Treasury the money. . . . The other alternative, Obama . . . can simply declare a national emergency and raise the debt ceiling on his own initiative.  He could govern as a dictator.” What would happen if the U.S. did default?  Dr. Roberts says, “The danger of default is the rest of the world dumps dollars.  If they dump dollars, the Fed loses control, the whole system blows up.  The banks fail.  The bond market collapses.  The stock market won’t go down 1,500 points; it would be cut in half. ” No matter what happens, there is still an enormous and growing debt.  Dr. Roberts contends, “The situation is unsustainable.”  It will blow up at some point, and Dr. Roberts predicts, “It will be worse than the Great Depression because in the Great Depression, prices fell along with employment.  Now, prices will be rising and employment would be falling. . . . Gold and silver prices will explode in dollar terms.”


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