Monday, June 13, 2011

It's not the speed of the fall, it's the sudden stop that sucks

According to Chinese banking sources talking to the Financial Times of London the big Wall Street banks have let it be know that they won’t be depending as much on US Treasury bonds. Normally these bonds to used as collateral to back financial transactions as they have the highest possible rating and aren’t discounted for risk, and are treated as if they were cash. (plus they pay interest unlike cash) Wall Street will be using a variety of debt instruments and cash to back their transactions instead.

The conclusion you might jump to is that Wall Street has decided that the Republicans are indeed bat crap crazy and will default on the debt. The 14th Amendment forbids the US Government defaulting on its debt, “Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

The phrase “shall not be questioned” has be interpreted to mean public officials would be in violation of their oath to “uphold and defend the Constitution” to even suggest a failure to pay the debt. Some scholars believe the Debt Ceiling Law to be in violation of this Amendment. In this light the President could assert he has the authority to continue borrowing to pay for spending authorized by Congress regardless of any limit imposed by an unconstitutional debt limit.

But what is Wall Street really up to? The Fed has just finished buying 600 billion in Treasuries and paying 900 billion on the open market to buy them, and guess who made the profit? That’s right, Wall Street. They now have lots of cash and not so many bonds and the price is up. As the price of bonds goes up the interest rate goes down and this was the Federal Reserve’s stated purpose to cut interest and thus stimulate the economy.

So if the Wall Street banks can “talk down” the value of bonds the price will fall and then they can buy them cheap while planning that there will again be a huge demand for bonds with the next panic. In 2008 the demand for Treasuries was so great that the Government was able to sell them bearing negative interest. In other words the Treasury made money by borrowing money instead of paying to borrow.

So trillions and trillions of dollars that exist only on paper get shuffled back and forth making the rich richer while the other 98% of us pay for it. How will we pay? Driving down bond prices will drive interest rates up and tank that economic recovery we were all counting on. Asset prices will begin to fall and the corporations that are sitting on trillions they got for free can buy cheap. If they have their way it will be for pennies on the dollar.

Your home’s value will fall through the floor, your employer will pressure you to take a huge pay cut if you still have a job and that 401(k) will become a 101(k). Gold is not a refuge from this sort of calamity, some people you might think of as shrewd have been selling gold. Unfortunately there can be many twists and turns to this sort of thing so an exact prediction is impossible, but where ever we are going, we seem to be picking up speed.


Anonymous said...

For those Americans willing to move, it might be best time ever to leave and upgrade.

Australia's shocking labor shortage: Construction workers can make more than

prairie2 said...

Like I said, under 40 with skills and if you read further into the article, Australia isn't bringing in that many people.

Anonymous said...

uhm, Oz is going through an incredible housing/real estate bubble right now, and the right wing fascists have already taken root over there. its been this way since the past few years too. they're always 10 steps ahead arent they?

canada is also going through a housing/real estate bubble, but the right wing is not as much of a threat over there.