Friday, February 6, 2009

Open the Floodgates (Part 2)

Bill Gross of Pimco says we need to spend trillions of dollars immediately to prevent a depression.

There's an entertaining thought. If we can only spend $1tr on dog parks, golf courses, roads, museums, rural wireless internet, social programs, green energy, non-profit (but not really) lobby and voter-fraud organizations, purchasing worthless debt from insolvent companies etc. ad nauseum, we'll pull the economy RIGHT OUT of the toilet.

What Gross is really concerned about is trying to make sure everyone's ready to spend enough money to cover the massive mistakes and fraud that have occurred in the financial sector without holding any of the fraudsters accountable. He wants to make sure that all the thieving fat cats get away with their jets and billion dollar bonuses, made while lying through their teeth about the true financial status of their organizations.

Here again, the specter of foreign investors turning up their nose at buying more of our debt is raised.

Government borrowing will probably reach $2.5 trillion during the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc.

Speculation has risen that China, which holds $681.9 billion of Treasuries as the single largest investor in U.S. debt, may stop or slow the purchases of U.S. debt as its own economic growth slows.

“To the extent that the Chinese and others do not have the necessary funds, someone has to buy them,” Gross said. “It is incumbent upon the Fed to step in. If they do, that will be a significant day in the bond market and the credit markets.”

Does this make any sense to anyone else? I've asked before, what good is a new dog park going to do to help out businesses struggling under a load of high taxes and asinine Government bureaucracy and regulations?

Instead of spending money, why not severely curtail Government Spending (yes, that means you Mr. Entitlement program), lower taxes (I've heard it suggested we lower our corporate tax rates to 12%, just like Ireland has), and reduce the tax load on our American workers to help them make ends meet better, reduce their debt load, and get back to responsible consumption. Why not use those lower tax rates to attract more businesses into the country and increase jobs and productivity.

Letting these insolvent banks and businesses fail, their assets (and liabilities - including all that toxic debt we seem so keen on saddling the taxpayer with) go into receivership and bankruptcy, will go a long ways towards fixing this issue. Attempting to pay for debt such as mortgage backed securities, the contents of which are opaque and impossible to gauge, will just leave us essentially pouring money into the pockets of those people who were stupid enough to buy them in the first place.

That's right, buying toxic debt rewards the fraudsters that made that bad decision in the first place, and saddles their mistake on you and me.

We have such an aversion to letting bad businesses fail, that we're going to potentially drag the entire country down with them. Drag ALL debts and debt instruments into the open where they belong.

Value those securities at current market value - they're not worth more than that!! If they were worth more than their current market value, trust me, these idiots would be selling them ASAP! Reset leverage limits to 10 to 1. After valuation of their assets using the actual market value, anyone who fails to make that 10 to 1 leverage limit will declare bankruptcy, sell off their viable assets to corporations that have been responsible and are solvent, and we can move on with life.

Yes, this will cause more unemployment in the short run. But we will pull out of this nose dive a lot faster if everyone in the market knows exactly where everyone else sits. It's the only way to do this without potentially bankrupting our country and destroying our way of life.

Says Denninger at The Market Ticker:
I want to expand on the bond market problem because it is absolutely critical to understand this, and for the Obama administration to put an immediate halt to it.

Prices respond to only one thing in "reality" - supply and demand. Both can be illusory which produces short-term distortions but the truth always pokes its head through and when it does, the direction becomes clear.

Treasury, The Fed and Congress (the previous one) have in aggregate promised some seven trillion dollars in spending they do not have. This of course will eventually require issue of debt to find it in one place or another. The current spending plans of both Treasury and Congress are guaranteed to require upwards of $2 trillion of issue this fiscal year (running through September 30th.)

This last couple of weeks Treasury has been issuing bonds like crazy and as they have bond prices have taken a dive into the mud. Why? Because the supply has to be taken up by someone so that Treasury can fund the nation's promises, and as that supply is taken up money is sucked out of the system to buy those bonds. This then upsets the supply and demand picture in equities.

Reality has started to intrude into the market and it's not a pretty picture. FCBs sold Treasury and so did Primary Dealers in the most recent week. This is new, it is ominous, and it signals that market participants in the bond market have detected smoke in the room. Should they all rush the door at once the bond market dislocation that I have been warning of for months will gather steam and cut off federal funding, along with kneecapping the stock market. The Fed cannot possibly absorb this supply as it will not be limited to Treasuries; they would have to print up literally $20 trillion dollars to halt the collapse and should they attempt it the dollar would collapse instead as that would be a literal ten times over expansion of the monetary base. This would produce a monetary and market implosion twice as bad as what occurred in Iceland overnight.

This is where neoclassical monetary theory meets reality. In the real world credit leads, it is the dog and money supply is in fact the tail. When regulation of credit is abdicated to the degree we have seen in the last five years the resulting credit collapse cannot be avoided through diddling monetary and fiscal policy as the tail cannot wag the dog.

No comments:

Current Quote

"I would rather be exposed to the inconveniences attending too much liberty than to those attending too small a degree of it." – Thomas Jefferson