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Crude oil kept on keeping on and closed up 3.4% in New York at $68.58 a barrel
Posted: Aug 11, 2015
Treasury Secretary Tim Geithner was in Beijing promising that the U.S. would be a good borrower and reduce its deficits and not to worry about them so much and just make nice please and stop worrying and smile for the cameras would you please? Meanwhile, former Chinese central bank adviser Yu Yongding was more direct. "I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds','' Yu said in an interview yesterday. "The euro is an alternative. And there are lots of raw materials we can still buy.'' Yes, there are. And by the way, why not a gold exploration boom? Gold mining requires lower capital overheads than bulk materials extraction. And with a rising gold price, it's worth a punt. If the gold mania really takes off (it's starting), look for a boom in the junior explorers. But back to Yu. Yu has encouraged the U.S. to think about China's interests, "So that your own interest can be protected...You should not try to inflate away your debt burden." He hinted that if the U.S. does that, China has options like the euro. "Yes, some people say the euro is very weak...Okay, weak is good, we'll buy very cheap.'' The man is both a psychic and a good trader. He is also a moralist with an old fashioned sense of fiscal responsibility. "The borrower should keep their promises...The U.S. should be a responsible country." Note to Yu. U.S. central bankers and government policy makers gave up being responsible a long time ago. 1913, 1971, 1980...take your pick.
The policy of perpetual debt and gradual inflation has been around for nearly a century now. The only trouble is that the liability side of the Federal balance sheet has exploded. Hence the need for greater inflation via quantitative easing...and the situation we all find ourselves in today. It's just the sort of thing that could trigger another dollar crisis. And THAT is what's really behind the market moves, we think. It's not a cyclical rotation out of bonds into higher risk assets because everything's peachy. It's a stealth retreat from U.S. bonds under the covering story of economic recovery. But what's really going on is that investors are heading for the door on U.S. debt. Ten-year yields spiked again today and bond prices fell. Goldman Sachs reckons the U.S. will have to borrow over $3 trillion this year to finance new deficits and roll over old ones. And if it can't borrow it, the Fed will have to buy it.
For some reason, the Fed is confused about why bond yields are rising. A Reuters headline reads, "Federal Reserve puzzled by yield curve steepening." Are investors ditching the dollar and U.S. bonds because the U.S. credit rating is in jeopardy? Is the huge new supply of debt causing the Bond Vigilantes to protest inflation and punish President Obama buy selling bonds? Or are investors just so confident in the economy now that they feel no need to hide out in the government bond market until they get the all clear signal? Hmm. What's so confusing again? A few years ago, we called it "The Money Migration." That still seems like the right description today.
You've got a debtor nation whose largest corporate institutions are failing (perhaps a preview of State failure). It's shipped its industrial infrastructure off-shore and replaced it with a financial industry that thrived on credit and derivatives. And now you wonder why investors are pushing interest rates on your debt up? It's not hard to see who's in the global driver's seat now. It's creditors and producers. And for Australia's sake, that's good news. Because the world's largest creditor and producer is keenly interested in Australian assets, both as a hedge against the fading greenback and as a key input to its long-term expansion, which seems to be coming along just fine for now.
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