by Rick Rozoff
Global Research, August 4, 2010
Stop NATO – 2010-08-03
On September 17, 2009 U.S. Secretary of Defense Robert Gates and President Barack Obama separately announced plans to shift the emphasis of the global American interceptor missile – so-called missile shield or anti-ballistic missile defense – project from the previous George W. Bush administration’s plans to a more mobile, flexible and geographically broader system. [1]
The proposed deployments of ten ground-based interceptor missiles in Poland and a forward-based X-band radar installation in the Czech Republic were abandoned in favor of what Obama deemed “stronger, smarter and swifter defenses of American forces and America’s allies.” Both Poland and the Czech Republic, however, remain part of Pentagon plans and will be incorporated into a broader grid with all 28 members of the North Atlantic Treaty Organization which in its final stage will cover all of Europe. Or at least the entire continent west of Russia and Belarus.
Plans for ground-based interceptors in Poland alarmed Russia, which necessarily saw them as aimed at itself, but would also have been housed in fixed silos that made them easy targets.
In the month before the announced change in American plans to begin the incremental buildup of a missile shield in Eastern Europe – phased adaptive approach in government terms – a report surfaced at the annual U.S. Space and Missile Defense Conference of the Boeing Company planning a 47,500-pound mobile interceptor missile launcher to be deployed within 24 hours to NATO bases in Europe. [2] During the same month the Missile Defense Agency and Boeing also announced the successful test of their joint Airborne Laser (ABL) anti-missile system [3].
At the end of last August the first disclosure appeared of plans to expand U.S. interceptor missile deployments to the Balkans and the Black Sea region, Israel and Turkey. [4] The head of the Missile Defense Agency, Lieutenant General Patrick O’Reilly, said at the time that he supported the installation of Standard Missile-3 (SM-3) interceptors in the Balkans and Turkey. (In 2007 his predecessor, Lieutenant General Henry Obering, mentioned placing U.S. interceptor missile radar sites in the Caucasus and even Ukraine.)
The SM-3 is a ship-based anti-ballistic missile and anti-satellite interceptor – used to destroy an American satellite in orbit over the Pacific Ocean in February of 2008 – and part of the U.S. and allied Aegis ballistic missile defense system. It has the main advantage of being deployable around the world on destroyers and cruisers. What O’Reilly was referring to, though, was a combination of sea-based SM-3s and their adaptation for use on land.
In describing current U.S. missile shield plans last September, Pentagon chief Gates spoke of a four-phase program that began with the deployment of Aegis class warships equipped with SM-3s in the Eastern Mediterranean Sea last year, to be followed by enhanced versions of the missile both on sea and land, with successive generations of more advanced models in the third and fourth stage.
This February plans to station land-based SM-3s in Bulgaria and Romania were announced [5], and when Secretary of State Hillary Clinton met with Polish Foreign Minister Radoslaw Sikorski in the latter’s nation early last month to sign an amended agreement on interceptor missile cooperation, it was revealed that SM-3s will be stationed in Poland in the second phase of the Pentagon’s plan for a continent-wide interceptor system. [6] Slightly more than a month before, the U.S. moved Patriot Advanced Capability-3 (PAC-3) interceptors and approximately 100 troops into eastern Poland, only a few kilometers from Russia’s Kaliningrad exclave. [7] U.S. deployments in the country are also part of a broader NATO strategy. [8]
Connecting the ship- and land-based components of the global U.S. missile shield in Eastern Europe with other locations to the east and the south, the Pentagon has also been qualitatively expanding Patriot Advanced Capability-3 and Standard Missile-3 deployments in the Persian Gulf. Washington is now preparing to provide Gulf Arab states with the longer-range Terminal High Altitude Area Defense (THAAD) missile intercept system. [9]
Last October and November the U.S. and Israel conducted the fourteen-day Juniper Cobra 10 exercise with five missile interception systems, the largest such live-fire maneuvers ever held. An American military officer present at the war games said the unparalleled drills would “help the development of a planned NATO missile shield for Europe.” [10] A year before, the U.S. deployed an X-band missile shield radar (Army Navy/Transportable Radar Surveillance) to Israel with 120 troops, the first and to date only long-term foreign troop deployment in Israel’s history.
Washington and NATO are well advanced in solidifying an impenetrable interceptor missile system from the Baltic Sea to the Arabian Sea and the Black Sea to the Red Sea.
In the past few days further details have emerged concerning the expansion of those plans in both breadth and sophistication.
On August 30 Czech Prime Minister Petr Necas announced that “his government has been negotiating a plan with the United States to place a warning center in the Czech Republic as part of a reworked U.S. missile defense plan.” He also stated that personnel manning the facility could be provided by the U.S. and other NATO states and that the site could even be based in his nation’s capital, Prague. Necas added, “The U.S. plans to initially invest $2 million in 2011 and 2012 for the center, which is expected to become part of a joint NATO missile defense shield in the future,” [11] and that no new treaty with Washington would be required for the project. Czech popular opposition to the earlier plan for an X-band missile defense installation was credited for the U.S. discarding the Bush-era plan.
Two days afterward Czech Defense Minister Alexandr Vondra confirmed that the U.S. had allotted $2 million for the construction of the facility, that American experts would be deployed there and that it would be in operation by the middle of next year. Vondra added, “I believe it will be one of many parts of the NATO system….” [12]
In August of last year the Polish newspaper Gazeta Wyborcza revealed that the U.S. would expand its interceptor missile plans to the Balkans, Israel and Turkey. This August the Washington Post belatedly confirmed that design.
An article by staff writer Craig Whitlock appeared in the August 1 Sunday edition of the newspaper which quoted several U.S. military officials to the effect that:
“The U.S. military is on the verge of activating a partial missile shield over southern Europe….
“Pentagon officials said they are nearing a deal to establish a key radar ground station, probably in Turkey or Bulgaria. Installation of the high-powered X-band radar would enable the first phase of the shield to become operational next year.
“At the same time, the U.S. military is working with Israel and allies in the Persian Gulf to build and upgrade their missile defense capabilities. The United States installed a radar ground station in Israel in 2008 and is looking to place another in an Arab country in the gulf region.”
Not substituting for deployments in Poland and the Czech Republic, as has been seen above, but adapting and extending the network of which they are a part southward and eastward.
The Washington Post feature added that although the interceptor missile projects in Eastern Europe, the Eastern Mediterranean and the Persian Gulf are technically distinct, “they are all designed to plug into command-and-control systems operated by, or with, the U.S. military. The Israeli radar, for example, is operated by U.S. personnel and is already functional, feeding information to U.S. Navy ships operating in the Mediterranean.”
Providing historical perspective and dispelling the prevalent notion that the current administration’s plans are in any manner a retreat from those of its predecessor, the piece stated:
“The concept of a missile shield began with former president Ronald Reagan, who first described his vision of a defense against a Soviet nuclear attack in his ‘Star Wars’ speech in 1983….It has expanded further under President Obama, despite the skepticism he expressed during the 2008 campaign about the feasibility and affordability of Bush’s plan for a shield in Europe.
“In September, Obama announced that he was changing Bush’s approach. Instead of abandoning the idea, he directed the Pentagon to construct a far more extensive and flexible missile defense system in Europe that will be built in phases between now and 2020.” [13]
The author provided these additional details:
Starting late last year the U.S. has steadily deployed Aegis class warships in the Mediterranean Sea equipped with Spy-1 360 degree missile radar and “arsenals of Standard Missile-3 interceptors [which] will form the backbone of Obama’s shield in Europe.”
The initial detachments, one or two destroyers and cruisers at a time, will be tripled in number. Furthermore, “the Obama administration has plans to nearly double its number of Aegis ships with ballistic missile defenses, to 38 by 2015.”
Citing the commander of the U.S. Sixth Fleet in the Mediterranean, Vice Admiral Henry B. Harris Jr., the Washington Post article stated that one “option would be to assign some Aegis ships to home ports in Europe instead of making them sail constantly back and forth to the United States.
“Other Navy officials have floated the idea of flying in fresh crews so a ship could more or less deploy continuously, obviating the need for long breaks.”
It then supplied further specifics, disclosing that “Aegis ships, armed with dozens of SM-3 missile interceptors, will patrol the Mediterranean and Black seas and link up with…high-power radar planned for southern Europe.”
Romania will host land-based Standard Missile-3 deployments and Poland will follow as the site of SM-3s and additional sensors.
Although as recently as last year the Pentagon envisioned a total of 147 SM-3s, the Obama administration intends to nearly triple that number to 436. The new strategy “will require an unspecified number of new SM-3 missiles, which cost between $10 million and $15 million apiece.”
The system will expand in earnest after the NATO summit in Portugal in November, when the U.S.’s 27 members in the military bloc are expected to endorse a comprehensive, layered, mobile interceptor missile system for the entire European continent, albeit still firmly under U.S. control.
The Missile Defense Agency’s O’Reilly “said combined defenses would feature the best of both worlds: an ‘upper layer’ framework of SM-3 and Terminal High Altitude Area Defense, or THAAD, interceptors, operated by the United States, that could shoot down enemy missiles in space or the upper atmosphere; and a ‘lower layer’ of Patriot batteries, operated by European allies, providing a second layer of defense closer to the ground.” [14]
Terminal High Altitude Area Defense missiles have a longer range than both the PAC-3 and SM-3 and had not been discussed before as part of the new system.
Regarding the placement of U.S. and NATO interceptor missiles in Romania, on the Black Sea across from southwestern Russia, a recent analysis examined the geopolitical consequences:
“This means that the U.S. front line of defense is shifting from the eastern border of Germany to the Black Sea, which is adjacent to the Middle East, the Caucasus and Russia.
“Romania is ready to accept deployment of 20 SM-3 anti-ballistic missile units, currently installed on American naval vessels with the Aegis Combat System. These missiles could later be replaced with the more advanced terminal high altitude area defense (THAAD) missiles. They will also be deployed in Bulgaria. Meanwhile, it has become more likely that the X-band radar system, which the U.S. originally planned to install in the Czech Republic, will be set up in Israel.” [15]
Bulgarian Defense Minister Anyu Angelov was summoned to Washington for six days starting in late June for “the launch of technical negotiations about NATO’s missile defence in Europe in general” [16] and meetings with Defense Secretary Gates, Air Force Secretary Michael Donley and Under Secretary of State for Arms Control and International Security Affairs Ellen Tauscher, the last-named the key point person in securing U.S. missile shield deployments in Eastern Europe.
Angelov was given his marching orders and returned home to confirm that his nation will join the U.S. interceptor missile program in Europe (and beyond) and that “Bulgaria is participating actively in the discussions and the practical realization of all steps concerning the establishment of a NATO-wide missile defense system.” [17]
For domestic consumption he presented the decision as his country’s own – “We are the most interested state in Europe in the establishment of a missile shield because we are in the most threatened region – we fall within the range of ballistic missiles, medium-range ballistic missiles [such] as the ones employed by the states in the wider Middle East” – but since Bulgaria was incorporated into NATO in 2004 it now receives orders from the White House, the State Department and the Pentagon.
In a recent report that 700 Bulgarian combat troops have been ordered to Afghanistan (as Dutch troops have left), a leading local news agency demonstrated how such decisions are made: “Bulgaria’s center-right government, elected last July, initially said it would not be able to provide more forces in Afghanistan due to the economic crisis, but later changed its strategy under pressure from the United States and NATO.” [18]
The same relationship of supremacy and subordination obtains between the U.S. and all other NATO members, particularly the twelve new acquisitions in Eastern Europe from the Baltic Sea to the Adriatic Sea.
The Pentagon has secured seven new military bases in Bulgaria and Romania since the latter two states joined NATO in 2004. Those sites include the Bezmer Air Base in Bulgaria, fifty kilometers from the Black Sea, and the Mihail Kogalniceanu Air Base in Romania near the city of Constanta on the Black Sea. Both are being upgraded to strategic air bases which, already employed for the wars against Afghanistan and Iraq, are available for strikes against Iran and in the South Caucasus in the event of an equivalent of the Georgian-Russian war of two years ago. The Romanian base is the main headquarters for the Pentagon’s Joint Task Force-East.
At any given time there are several thousand U.S. troops in Bulgaria and Romania, the first foreign forces in Bulgaria since shortly after the end of World War Two and in Romania since 1962.
A comparable situation exists in Poland. An American military newspaper recently ran a feature on the deployment of Patriot missile batteries in the country called “U.S. Army’s presence in Poland most significant since World War II” in which an American Army spokesman stated, “We have between 80 and 150 troops going there on a regular basis. We’ve never had that number and for that long of a period.” No foreign troops had been stationed in Poland since the dissolution of the Warsaw Pact in 1991.
The article also stated that “For the first time since the end of World War II, U.S. Army soldiers are making regular rotations into Poland, this time to train its forces to use Patriot missiles.
“Forty miles from the Russian border, a small group of U.S. Army Europe soldiers is instructing the Polish military about the missiles, which are designed to counter tactical ballistic missiles, cruise missiles and advanced aircraft.” [19]
A Fox News report characterized the operation as “the first long-term U.S. troop presence…in Poland,” and quoted U.S. ambassador to the nation Lee Feinstein as maintaining “It’s U.S. boots on the ground, a very tangible symbol of the U.S.-Polish alliance.” [20]
Regarding Israel, where the U.S. has also deployed the first foreign troops on that country’s soil, in late July the U.S. House Appropriations Subcommittee on Defense added $95.7 million to a White House funding request for Tel Aviv’s long-range Arrow and medium-range David’s Sling anti-ballistic missile programs subsumed under the Iron Dome layered air and missile defense system. Abiding by the subcommittee’s recommendations, Congress will allot $422.7 million for the above purpose for next year (with $109 million for the Arrow 3 system), bringing total U.S. underwriting of Israeli interceptor missile programs to $1 billion over the past four years.
According to member of the subcommittee Congressman Steve Rothman, “Given the concern and attention that we are focusing now on every dollar we are expending on behalf of the US taxpayer for all purposes, including the defense of the United States and its allies, it is a mark of the importance of these projects that they were all funded so robustly and fully by our subcommittee.” [21]
By absorbing most all of Eastern Europe into NATO, the U.S. has also provided its Israeli ally access to air bases and training sites of strategic significance for future attacks on neighboring Middle East nations. On July 29 Israeli Deputy Defense Minister Matan Vilna’i stated, “We fly in Romania so we can act deep inside neighboring Arab states.” [22]
The more extended and flexible, the “stronger, smarter and swifter” U.S. missile strategy, then, pursues a trajectory from the Baltic Sea, with Standard Missile-3-equipped Aegis warships also available for service in the Norwegian and Barents Seas, to Southeastern Europe into the South Caucasus, Mediterranean Sea, Red Sea and Persian Gulf, covering Russia’s western and southern flanks and encroaching upon Iran.
When President Obama visits India in November he intends to secure billions of dollars in arms deals with the world’s second most populous nation.
On July 12 Russia’s Vzglyad newspaper reported that “The deal, if signed during Obama’s visit, would [have] the US replace Russia as India’s biggest arms supplier…adding that the deal would also help India curb China’s rise.
“India’s shortlist includes Patriot defense systems, Boeing mid-air refueling tankers and certain types of howitzers, and the total cost of the deal may exceed $10 billion….” [23].
By selling anti-ballistic missile systems to India – starting with Patriots and advancing to longer-range models – Washington will connect its missile interception network from Europe through the Middle East to its eastern wing, that which includes 26 ground-based interceptors at Fort Greely in Alaska, a 280-foot-tall, 50,000-pound sea-based X-band radar in the Aleutian Islands, and PAC-3, SM-3 and THAAD missiles in Japan, South Korea and Australia.
Current U.S.-China tensions, the worst in several decades, were triggered early this year when Washington confirmed it was providing Taiwan with 200 advanced Patriot missiles and warships capable of being upgraded for the Aegis Combat System. [24]
For all the talk of protecting the U.S. Mainland from alleged Iranian and North Korean missile threats – accusations that are in the first case absurd and in the second highly improbable – at the end of the day Washington and its military allies around the world are well on the way to encircling Russia, China and Iran with an insurmountable barrier of interceptor missile deployments in conjunction with the militarization of space and the Prompt Global Strike program. Neither those three nations nor any other outside the rapidly expanding U.S. global military nexus will be permitted to retain effective deterrence or retaliation capabilities.
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by Doug Noland
For yet another volatile week, the S&P500 ended little changed (down 1.2% y-t-d), while the Dow added 0.4% (up 0.4%). The Banks gained 1.5% (up 13.9%), and the Broker/Dealers jumped 1.9% (down 7.2%). The Morgan Stanley Cyclicals declined 0.8% (up 3.4%), while the Transports rose 1.2% (up 7.9%). The Morgan Stanley Consumer index slipped 0.3% (up 0.9%), while the Utilities fell 0.6% (down 2.4%). The S&P 400 Mid-Caps dipped 0.4% (up 4.6%), and the small cap Russell 2000 ended the week unchanged (up 4.1%). The Nasdaq100 declined 0.6% (up 0.2%), and the Morgan Stanley High Tech index fell 1.4% (down 3.9%). The Semiconductors dropped 4.3% (down 3.1%). The InteractiveWeek Internet index fell 1.4% (up 4.1%). The Biotechs gained 0.7%, increasing 2010 gains to 12.5%. With bullion $, the HUI gold index fell 2.0% (up 3.0%).
One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 14 bps. Two-year government yields fell 5 bps to 0.52%. Five-year T-note yields sank 17 bps to 1.52%. Ten-year yields fell 9 bps to 2.91%. Long bond yields dipped 2 bps to 3.99%. Benchmark Fannie MBS yields dropped 18 bps to 3.47%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 9 bps to 56 bps. Agency 10-yr debt spreads narrowed 6 bps to 18 bps. The implied yield on December 2010 eurodollar futures fell 8.5 bps to 0.435%. The 10-year dollar swap spread declined 2.5 to negative 1.0. The 30-year swap spread declined 3 to negative 27.5. Corporate bond spreads narrowed. An index of investment grade spreads narrowed 2 to 104 bps.
Debt issuance was brisk. Investment grade issuers included AT&T $2.25bn, Crown Castle Towers $1.55bn, Alcoa $1.0bn, McDonald’s $750 million, Commonwealth Edison $500 million, Safeway $500 million, Union Pacific $500 million, and Kimberly-Clark $250 million.
Junk issuers included Ford Motor Credit $1.25bn, Texas Industries $650 million, AMD $500 million, Range Resources $500 million, Inventive Health $275 million, and Tenneco $225 million.
Converts issuers included Gilead Sciences $2.2bn.
International dollar debt sales included Canadian Imperial Bank $4.25bn, UBS $2.5bn, Turkey $2.0bn, Brazil $1.5bn, Air Canada $1.1bn, Chile $1.0bn, Westpac Banking $3.0bn, Offshore Group $1.0bn, Noble Group $750 million, Berau Capital Resources $450 million, Viterra $400 million, Aircastle $300 million, Banco BMG $250 million and Barbados $200 million.
U.K. 10-year gilt yields dropped 11 bps to 3.32%, and German bund yields declined 4 bps to 2.67%. Greek 10-year bond yields fell 12 bps to 10.28%, and 10-year Portuguese yields sank 35 bps to 5.18%. The German DAX equities index slipped 0.3% (up 3.2% y-t-d). Japanese 10-year “JGB” yields were little changed at 1.06%. The Nikkei 225 gained 1.1% (down 9.6%). Emerging markets were mixed to higher. For the week, Brazil’s Bovespa equities index rose 1.8% (down 1.6%), while Mexico’s Bolsa declined 1.5% (up 3.7%). Russia’s RTS equities index increased 2.3% (up 2.7%). India’s Sensex equities index fell 1.4% (up 2.3%). China’s Shanghai Exchange rallied another 2.5% (down 19.5%). Brazil’s benchmark dollar bond yields declined 4 bps to 4.25%, and Mexico’s benchmark bond yields sank 11 bps to 4.19%.
Freddie Mac 30-year fixed mortgage rates declined 2 bps last week to 4.54% (down 71bps y-o-y). Fifteen-year fixed rates fell 3 bps to 4.00% (down 69bps y-o-y). One-year ARMs dropped 6 bps to 3.64% (down 116bps y-o-y). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up one basis point to 5.45% (down 91bps y-o-y).
Federal Reserve Credit declined $3.4bn last week to $2.312 TN. Fed Credit was up $92.4bn y-t-d (7.2% annualized) and $302bn, or 15.0%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 7/28) jumped another $13.9bn (6-wk gain of $65.9bn) to a record $3.146 TN. “Custody holdings” have increased $190bn y-t-d (11.2% annualized), with a one-year rise of $353bn, or 12.6%.
M2 (narrow) “money” supply expanded $11.9bn to $8.614 TN (week of 7/19). Narrow “money” has increased $103bn y-t-d, or 2.2% annualized. Over the past year, M2 grew 2.1%. For the week, Currency added $1.3bn, while Demand & Checkable Deposits slipped $0.2bn. Savings Deposits increased $13.6bn, while Small Denominated Deposits declined $3.9bn. Retail Money Fund assets increased $1.0bn.
Total Money Market Fund assets (from Invest Co Inst) increased $3.6bn to $2.802 TN. In the first 30 weeks of the year, money fund assets fell $492bn, with a one-year decline of $832bn, or 22.9%.
Total Commercial Paper outstanding increased $1.5bn to $1.101 TN. CP has declined $69bn, or 10.2% annualized, year-to-date, while it was up $36bn from a year ago.
International reserve assets (excluding gold) – as tallied by Bloomberg’s Alex Tanzi – were up $1.421 TN y-o-y, or 20.2%, to a record $8.445 TN.
Global Credit Market Watch:
July 26 – Bloomberg (Andrew MacAskill): “European Union stress tests found banks need to raise 3.5 billion euros ($4.5 billion) of capital, about a tenth of the lowest analyst estimate, leaving doubts about whether regulators were tough enough. ‘The stress tests are a helpful step forward in a number of areas,’ Huw van Steenis, head of European banks research at Morgan Stanley… said… ‘But they are not going to be the game changer that we were really hoping and in some cases are a missed opportunity.’”
July 30 – Wall Street Journal (Mark Gongloff, Chris Dieterich and Alex Frangos): “The global corporate-bond boom is gathering steam as companies rush to take advantage of some of the lowest borrowing costs in history. Companies from global giants McDonald’s Corp. and Kimberly-Clark Corp. to Indonesian telecommunications company PT Indosat Tbk are rushing to sell debt. This month has been the busiest July on record for sales by U.S. companies with junk-credit ratings. Asia’s debt market is on pace for a record year, and European companies are also raising money apace.”
July 30 – Bloomberg (Sapna Maheshwari and Tim Catts): “U.S. corporate bond sales soared 31% this month, the busiest July on record… Issuance of $85.7 billion exceeded the previous high for the month of $71.1 billion set last year… Global issuance of $223.9 billion this month trails June’s total of $226.3 billion…”
July 30 – Bloomberg (Jason Webb): “Emerging-market bonds are heading for their biggest monthly rally since September, cutting yields to a record low, as accelerating economic growth and Argentina’s debt restructuring spur confidence. Developing nation bonds rallied 4.3% in July, reducing the average yield to 5.89%…”
July 28 – Bloomberg (Yalman Onaran): “Banks worldwide applauded changes to proposed capital and liquidity standards that relaxed aspects of the rules and gave lenders as much as eight years to comply. Lobbying groups in Europe and the U.S. praised the changes announced July 26 by the Basel Committee on Banking Supervision as steps in the right direction, while firms including Deutsche Bank AG and UBS AG welcomed the softening of rules proposed by the committee in December. European and Japanese bank stocks surged. ‘To a large extent, the committee has taken into account the concerns of the industry,’ said Charles Dallara, managing director of the… Institute of International Finance… ‘It’s too early to reach a firm conclusion because they still haven’t finalized many issues, but the announcement included a series of important clarifications.’”
July 28 – Bloomberg (Bradley Keoun): “Citigroup Inc. may move a team of proprietary traders into its hedge-fund unit, one of at least three alternatives the U.S. bank is studying to comply with the Dodd-Frank Act… The bank would set up the traders as hedge-fund managers and seed their funds, then raise money from outside investors to redeem its stakes, the people said. ‘This may be a way of keeping a high-margin capital- markets business in the fold, within the language of the law,’ said David Hendler, a senior analyst at… CreditSights Inc. ‘They would be transforming it from an- interest-plus-capital-gain business into a fee business.’”
July 27 – Bloomberg (Patricia Kuo): “Leveraged loans prices climbed to the highest in nine weeks as investors shifted money out of equity into debt. The average bid price for actively-traded European leveraged loans rose 45 bps to 94.3%… Fixed-income funds had $122.9 billion of inflows this year while $4.2 billion of assets left stock funds, according to U.S. research firm EPFR Global.”
July 28 – Bloomberg (Alex Kowalski and Tom Keene): “Economist David Rosenberg and investor Marc Faber have wagered a bottle of scotch whisky on whether U.S. 10-year Treasury yields can go lower than 2%. Rosenberg, chief economist at Gluskin Sheff & Associates Inc., predicted yields on the 10-year note will drop to less than 2%. Faber, the publisher of the Gloom, Boom & Doom report, said he doesn’t believe they’ll fall to less than December 2008’s low of 2.08%.”
Global Government Finance Bubble Watch:
July 30 – Bloomberg (Michael McDonald and Esme E. Deprez): “New York City will sell $470 million of Build America Bonds next week with the amount of the federally subsidized securities issued on pace to total $165 billion by year-end, when the program is set to expire… Build America Bonds became the fastest-growing part of the $2.8 trillion municipal bond market after they were created last year in President Barack Obama’s economic-stimulus package. More than $124 billion of the securities have been sold so far… The federal government pays 35% of the interest cost of Build Americas, saving states and cities money on public works projects… The subsidy helps issuers offer higher yields on the taxables than on tax-exempt debt, making them attractive to international investors and others who aren’t seeking tax shelters.”
Currency Watch:
July 26 – Bloomberg (Yasuhiko Seki and Hiroko Komiya): “The yen may climb next month as tighter regulations force Japanese households controlling about $76 billion in daily exchange trading to unwind bets on higher-yielding currencies, analysts said. The government will cap debt used to boost trading bets, or leverage, at 50 times committed cash from August 2010, down to 25 times in 2011… ‘If margin traders decide to discontinue highly leveraged transactions, it will put upward pressure on the yen as those positions are unwound,’ said Yuji Kameoka, senior economist… at Daiwa Institute of Research…”
July 26 – Bloomberg (Matthew Brown): “The combination of growing confidence in Europe’s economy and mounting evidence of a slowdown in the U.S. is driving euro bears into hiding… Goldman Sachs Group Inc. and Wells Fargo & Co. raised their estimates in the past two weeks, joining HSBC Holdings Plc and Deutsche Bank AG in predicting a stronger euro.”
July 26 – Bloomberg (Frances Yoon): “The dollar will fall against the yuan, euro and yen as China sells excess U.S. currency so that its reserves reflect trade flows, Faros Trading LLC said… ‘The net effect of China rebalancing its reserves in a slow and deliberate manner will result in a lower U.S. dollar,’ said Douglas Borthwick… managing director and head of trading at Faros. ‘We believe the foreign-exchange markets are at the beginning of a significant shift.’”
July 26 – Bloomberg (Daniel Kruger and Rebecca Christie): “For all the criticism of record budget deficits, President Barack Obama can take comfort knowing that for the first time in half a century, government bond yields are declining during an economic expansion and Treasury Secretary Timothy F. Geithner is selling two-year notes with the lowest interest rates ever. The combination of record-low yields on two-year notes, 10- year rates below 3% and a deficit projected to surpass $1.4 trillion for a second consecutive year is a signal that the bond market is less concerned with government spending than with getting the economy back on track.”
The dollar index fell 1.1% to 81.546 (up 4.7% y-t-d). For the week on the upside, the South African rand increased 1.9%, the British pound 1.7%, the Norwegian krone 1.6%, the South Korean won 1.4%, the Swedish krona 1.4%, the Swiss franc 1.3%, the Japanese yen 1.1%, the euro 1.1%, the Danish krone 1.1%, the Brazilian real 1.0%, the Australian dollar 1.0%, the Singapore dollar 0.7%, the Mexican peso 0.7% and the Canadian dollar 0.7%. For the week on the downside, the New Zealand dollar declined 0.2%.
Commodities Watch:
The CRB index jumped 2.9% (down 3.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) gained 1.8% (unchanged y-t-d). Spot Gold was down 0.7% to $1,180 (up 7.6% y-t-d). Silver declined 0.5% to $18.005 (up % y-t-d). September Crude slipped 19 cents to $78.79 (down 1% y-t-d). September Gasoline added 0.2% (up 3% y-t-d), and September Natural Gas jumped 7.6% (down 12% y-t-d). September Copper jumped 3.9% (down 1% y-t-d). September Wheat surged 10.9% (up 22% y-t-d), and September Corn jumped 5.8% (down 5% y-t-d).
China Watch:
July 30 – Bloomberg (Shamim Adam): “China sees little need for an imminent increase in interest rates, standing apart from Asian counterparts that are raising borrowing costs… People’s Bank of China officials said ‘that with a benign inflation outlook there was less need for higher nominal interest rates at this point,’ the International Monetary Fund said…after annual consultations with the Chinese government. ‘Also, they were concerned that higher interest rates could risk fueling capital inflows.’”
July 27 – Bloomberg: “The Chinese government’s fiscal revenue rose 27.6% in the first six months of the year to 4.3 trillion yuan, according to a statement from the Ministry of Finance…”
July 26 – Bloomberg: “Chinese banks may struggle to recoup about 23% of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator. About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue…”
July 27 – Bloomberg: “Credit ratings assigned to yuan- denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, Dagong Global Credit Rating Co.’s chairman said. Local government-backed borrowers shop around for the best rankings from Chinese ratings companies and ‘whoever gives them a better rating gets the business,’ Guan Jianzhong, chairman of privately owned Dagong… ‘This is very dangerous.’”
July 27 – Financial Times (Jamil Anderlini): “China’s banks are facing serious default risks on more than one-fifth of the Rmb7,700bn ($1,135bn) they have lent to local governments across the country, according to senior Chinese officials. In a preliminary self-assessment carried out at the request of the country’s regulator, China’s commercial banks have identified about Rmb1,550bn in questionable loans to local government financing vehicles – which are mostly used to fund regional infrastructure projects.”
July 27 – Bloomberg: “China’s banking regulator tried to ease concern over risks from bank lending to local government financing vehicles, saying such loans won’t necessarily go bad. The China Banking Regulatory Commission said in a statement that risks can be contained through measures to secure repayment… Chinese banks may struggle to recoup about 23% of the 7.7 trillion yuan ($1.1 trillion) lent to finance local infrastructure projects…”
July 29 – Financial Times (Robert Cookson): “China’s quest to transform the renminbi into an international reserve currency – and thereby challenge America’s dominance of the global monetary system – may take decades, if it happens at all. But this month, for the third time this year, China took another big step in that direction. Regulators lifted a raft of restrictions blocking the free flow of renminbi in Hong Kong… ‘[The new rules are] a big step in promoting the international use of the renminbi,” said Frances Cheung, a strategist at Crédit Agricole in Hong Kong.”
Japan Watch:
July 27 – Bloomberg (Toru Fujioka): “Japan’s government will ask ministries to cut their budgets by 10% for the year starting April 2011 as Prime Minister Naoto Kan tries to rein in the world’s largest debt load. The reductions will help the government keep spending at this year’s 71 trillion yen ($813 billion)…”
July 26 – Bloomberg (Keiko Ujikane): “Japan’s exports rose faster than economists estimated… Shipments abroad advanced 27.7% in June from a year earlier…”
July 29 – Bloomberg (Wes Goodman and Garfield Reynolds): “Japanese bond yields are approaching the lowest in seven years as the nation’s aging population snaps up securities in the world’s biggest debt market… ‘Older people are reluctant to take risk, and they love Japanese government bonds,’ said Tsutomu Komiya, who helps oversee the equivalent of $106 billion at Daiwa Asset Management… ‘The relationship between the bond yield and the age of the population is very strong.’”
India Watch:
July 27 – Bloomberg (Kartik Goyal): “India’s central bank increased a key interest rate more than economists forecast, battling to contain a surge in inflation that’s led to strikes and street rallies. The central bank raised the reverse repurchase rate a half point to 4.5%, and the repurchase rate to 5.75% from 5.5%…”
Asia Bubble Watch:
July 26 – Bloomberg (William Sim and Eunkyung Seo): “South Korea’s economy grew faster than expected in the second quarter, bolstering the case for a further increase in interest rates as Asia weathers global risks. Gross domestic product increased 1.5% from the previous three months…”
Latin America Watch:
July 28 – Bloomberg (Jonathan Levin and Andres R. Martinez): “Mexico’s central bank maintained its forecast for economic growth of 4% to 5% this year, bank Governor Agustin Carstens said.”
Unbalanced Global Economy Watch:
July 29 – Bloomberg (Simone Meier): “European confidence in the economic outlook rose to the highest in more than two years in July and German unemployment declined for a 13th month as exports sustained a recovery in the region.”
July 30 – Bloomberg (Simone Meier): “European inflation accelerated to the fastest pace in more than 1 1/2 years on rising energy costs and unemployment held at the highest in almost 12 years. Euro-area consumer prices rose 1.7% from a year earlier in July… The jobless rate remained at 10% for a fourth month in June… That’s the highest since August 1998.”
July 27 – Financial Times (Ralph Atkins): “Eurozone mortgage borrowing surged last month to the highest level in almost two years in a sign that bank lending across the 16-country region may be flickering back to life. Lending for house purchases rose at an annual rate of 3.4% in June… The acceleration pointed to a revival in consumer confidence and an increased willingness by banks to fuel the economic recovery with loans to the private sector.”
July 30 – Bloomberg (Candice Zachariahs and Lisa Pham): “Spain will probably lose its Aaa credit rating after the country was put under review for possible downgrade in June, and the U.S. needs a ‘clear plan’ to tackle its deficit, Moody’s… said.”
July 29 – Bloomberg (Flavia Krause-Jackson): “Italian business confidence advanced to a two-year high in July after the economy returned to growth and exports benefited from the euro’s decline.”
U.S. Bubble Economy Watch:
July 27 – Bloomberg (William Selway): “U.S. local governments may cut almost 500,000 jobs through next year to cope with sliding property taxes, a decline in state and federal aid and added need for social services, according to a report… The report, a result of a survey by the National League of Cities, the U.S. Conference of Mayors and the National Association of Counties, showed local governments are moving to cut the equivalent of 8.6% of their workforces from 2009 to 2011… ‘Local governments across the country are now facing the combined impact of decreased tax revenues, a falloff in state and federal aid and increased demand for social services,’ said the study… They called on Congress to pass a bill that would provide $75 billion in the next two years to local governments and community-based groups to stoke job growth and forestall deeper cuts.”
July 27 – New York Times (Nelson D. Schwartz): “By most measures, Harley-Davidson has been having a rough ride. Motorcycle sales are falling in 2010, as they have for each of the last three years. The company does not expect a turnaround anytime soon. But despite that drought, Harley’s profits are rising — soaring, in fact… Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production.”
July 28 – Bloomberg (Bob Willis): “Americans in the second quarter tapped the smallest amount of home equity in a decade… Owners took out $8.3 billion while refinancing prime home loans…Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.”
July 27 – Bloomberg (Prashant Gopal): “U.S. apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership and an improving job market for young adults encourages them to find their own places to live. The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half of the year, according to MPF Research, almost twice the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6% last month from 8.2% in December. ‘Overall demand is pretty stunningly strong in the first half,’ Greg Willett, a vice president at the… research firm, said…”
Central Bank Watch:
July 29 – New York Times (Sewell Chan): “A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy amid increasing signs that the economic recovery is weakening. On Thursday, James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming ‘enmeshed in a Japanese-style deflationary outcome within the next several years.’ The warning by Mr. Bullard… comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed… Mr. Bullard had been viewed as a centrist and associated with the camp that sees inflation, the Fed’s traditional enemy, as a greater threat than deflation. But with inflation now very low… and with the European debt crisis having roiled the markets, even self-described inflation hawks like Mr. Bullard have gotten worried that growth has slowed so much that the economy is at risk of a dangerous cycle of falling prices and wages. Among those seen as already sympathetic to the view that the damage from long-term unemployment and the threat of deflation are among the greatest challenges facing the economy, are three other Fed bank presidents: Eric S. Rosengren of Boston, Janet L. Yellen of San Francisco and William C. Dudley of New York. As the Fed’s board of governors shifts, the doves are getting more attention.”
July 29 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero. ‘The U.S. is closer to a Japanese-style outcome today than at any time in recent history,’ Bullard said… ‘A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.’”
July 28 – Bloomberg (Jennifer Ryan and Svenja O’Donnell): “Bank of England Governor Mervyn King said there may be a ‘considerable’ way to go before U.K. interest rates return to ‘normal’ as policy makers debate when to start withdrawing emergency stimulus from the economy. ‘There will come a point when we will certainly need to ease off the accelerator and return Bank Rate to more normal levels,’ King told lawmakers…”
Muni Watch:
July 27 – Bloomberg (William Selway): “U.S. state governments project revenue will climb in the current fiscal year after they raised taxes and cut spending to close budget gaps of $84 billion, a report from the National Conference of State Legislatures found. Revenue will increase 3.7%, after falling 1.5% in fiscal 2010. Even so, deficits of more than $12 billion may open for at least 29 states should Congress fail to extend extra aid, while two-thirds already forecast fiscal 2012 gaps of $72 billion… ‘The revenue chasm was so deep that climbing out of it is going to take some time.’”
California Watch:
July 28 – Los Angeles Times (Shane Goldmacher): “As California staggers toward the fifth week of the fiscal year without a spending plan, a month of closed- door talks in the Capitol have produced little but tension and finger-pointing. The calendar is flipping toward August with no resolution in sight. Top officials don’t even publicly agree about what they agree upon. The two parties are staging stunts at the Capitol and trading barbs in dueling radio addresses, each side accusing the other of being dug in or disengaged, or both. Gov. Arnold Schwarzenegger has demanded overhauls of the public pension system, the state tax code and the budgeting process, on top of the annual budget-balancing struggle. He has said he won’t sign a spending plan that lacks those things, and California could languish without one until he leaves office — in 2011… Meanwhile, California’s unpaid bills are piling up, the state’s worst- in-the-nation credit rating faces another downgrade and the prospect of printing IOUs for the second time in as many years threatens on the horizon… The state’s $19.1-billion shortfall remains despite a temporary increase in taxes last year and lawmakers’ slashing of billions from school budgets. Tuition at public universities has skyrocketed, and healthcare and other services for the poor have been scaled back.”
Real Estate Watch:
July 27 – Bloomberg (Kathleen M. Howley): “About 18.9 million homes in the U.S. stood empty during the second quarter as surging foreclosures helped push ownership to the lowest level in a decade… The ownership rate… was 66.9%, the lowest since 1999.”
July 29 – Bloomberg (Dan Levy): “Foreclosure filings climbed in three-quarters of U.S. metropolitan areas in the first half… according to RealtyTrac… Notices of default, auction or bank seizure rose more than 50% in areas including Salt Lake City; Savannah, Georgia; and Atlantic City… ‘Foreclosures are spreading out from areas that had been hardest hit,’ Rick Sharga, senior vice president… at RealtyTrac, said…”
July 28 – Bloomberg (Sharon Smyth): “Greek island homes, long coveted by millionaires and Hollywood stars such as Tom Hanks, are being marked down by as much as 45% as the country’s debt crisis destroys demand for holiday getaways. A half-built villa on Mykonos, an island in the Aegean Sea known for its all-night beach parties, is being offered by brokers… for 2 million euros ($2.6 million) after the price was reduced by 500,000 euros.”
Quantitative Easing Two:
Not even a week had passed since ECB President Trichet’s article, “Stimulate No More – It Is Now Time to Tighten,” before Federal Reserve Bank President James Bullard thrusts himself into the debate with his paper, “Seven Faces of ‘The Peril.’”
Dr. Bullard’s concluding sentences: “To avoid [the Japanese] outcome for the U.S., policymakers can react differently to negative shocks going forward. Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”
The New York Times (Sewell Chan) had a reasonable spin on Bullard’s piece: “A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy amid increasing signs that the economic recovery is weakening. … James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming ‘enmeshed in a Japanese-style deflationary outcome within the next several years.’ The warning by Mr. Bullard… comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed…”
Reading Dr. Bullard’s paper – and listening carefully to his comments – recalls Dr. Bernanke’s historic speeches back in late-2002: “Asset-Price ‘Bubbles’ and Monetary Policy”; “On Milton Friedman’s Ninetieth Birthday”; and “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” Dr. Bernanke fashioned the backdrop – erudite academic justification for aggressive “activist” monetary management – and today the Federal Reserve appears poised to embark only farther into perilous uncharted waters. Last week, I presumed that Mr. Trichet’s stark warning against further stimulus was in response to market clamoring for additional quantitative easing from the Fed. It would now appear his comments may have been directed squarely at our central bank.
“The Peril” in Dr. Bullard’s title is in reference to a 2001 academic article “The Perils of Taylor Rules.” In simple terms, many accept the thesis that there is potential “peril” confronting a monetary management regime at the point when policymakers have lowered rates to near zero – yet the inflation rate remains stuck in negative territory (“deflation”). Japan is used as a contemporary example of how policymakers failed to act convincingly to ensure operators throughout the markets and real economy understood that deflationary pressures would not be tolerated.
From Bullard: “The policymaker is completely committed to interest rate adjustment as the main tool of monetary policy, even long after it ceases to make sense (long after policy becomes passive), creating a second steady state for the economy. Many of the responses to this situation described below attempt to remedy this situation by recommending a switch to some other policy in cases when inflation is far below target. The regime switch required has to be sharp and credible. Policymakers have to commit to the new policy and the private sector has to believe the policymaker.”
Ten-year Treasury yields dropped to 2.92% today. Benchmark MBS yields sank 15 bps in two sessions to 3.49%. The markets are taking Dr. Bullard’s talk of a “sharp and credible” regime switch – Quantitative Easing Two – seriously. The dollar dropped another 1.1% this week and the CRB Commodities index jumped 2.9 %. The market backdrop is increasingly reminiscent of the summer of 2007. The initial ’07 eruption in subprime incited market weakness and volatility, an aggressive Federal Reserve response, a weak dollar and quite a run for commodities markets.
Back in 2002, I thought (and wrote as much) Dr. Bernanke’s monetary views were radical and dangerous. He burst onto the scene as the right guy at the right time to lead an epic battle against the scourge of deflation. I view the period 2001 through 2006 as a historic period of faulty analysis and failed monetary management. In short, zealous policy measures were implemented from a flawed analytical framework. While fighting so-called deflation risk, our central bank accommodated a perilous Bubble throughout mortgage and Wall Street finance. The Fed’s “activist” approach was an unmitigated disaster. Dr. Bullard’s paper addresses this period from an opposing perspective: “2003-2004… This period was the last time the FOMC worried about a possible bout of deflation.”
From Bullard: “The Thornton [St. Louis Fed economist] analysis emphasizes how the FOMC communicated during this period, and how the market expectations of the longer-term inflation rate responded to the communications. At the time, some measures of inflation were hovering close to one percent, similar to the most recent readings for core inflation in 2010. At its May 2003 meeting, the Committee included the following press release language: …. ‘the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level.’ At several subsequent 2003 meetings the FOMC stated that ‘…the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future.”
During the three-year period ’02-’04, benchmark MBS yields averaged 5.22%, down significantly from the 7.16% average from 2000-’01. The Fed was “successful” in jawboning rates lower, in spite of the unprecedented surge in demand for mortgage borrowings. “Activist” monetary policymaking circumvented market forces, allowing a huge increase in the demand for mortgage Credit to be satisfied at historically low market yields.
Well, you either believe that the market forces of supply and demand should be left to determine the price (market yield) of finance – or you don’t. And you either appreciate that the price of finance plays a fundamental role in the effective allocation of financial and real resources in a Capitalistic system – or you disregard this critical dynamic at the system’s peril. Inarguably, Federal Reserve rate policy and communications strategy were instrumental in distorting market prices (MBS, real estate, stocks, etc.) and perceptions of risk and, in the process, fomenting the great mortgage/Wall Street finance Bubble.
Focusing instead on the general price level, or “inflation,” Dr. Bullard comes to a very different conclusion with respect to policy performance during this crucial period: “In the event, all worked out well, at least with respect to avoiding the un-intended steady state. Inflation did pick up, the policy rate was increased, and the threat of a Japanese-style deflationary outcome was forgotten, at least temporarily. Was this a brilliant maneuver, or did the economic news simply support higher inflation expectations during this period?”
Regular readers know that I use the terms “Keynesian” and “inflationism” interchangeably. Inflationism has been an influential concept for centuries; Keynes just created the most sophisticated and alluring conceptual framework. I argued against the Keynesians earlier in the decade. The critical flaw in their theoretical construct is that the Federal Reserve somehow controls “THE” general price level. This is a dangerous myth perpetuated by those committed to activist monetary management.
The Keynesians take Credit for thwarting the deflationary forces from earlier this decade. After declining to about a 1% y-o-y rate during the first half of 2002, inflation was a “safer” 4% or so by 2006. This, it was said, provided policymakers the latitude they required to ensure the U.S. did not succumb to the Japanese predicament. In the process, total U.S. mortgage Credit almost doubled in just six years. The aggregate of consumer prices may have been reasonably tame, but asset prices and economic maladjustment were not. The Fed used mortgage Credit to reflate the system and, not surprisingly, we now face a much worse predicament.
The problem with inflationism has always been that once it gets ingrained within the system – in the Credit system, the real economy, within market perceptions, expectations and asset prices – there’s just no turning back. The more protracted the inflationary Credit boom – and the more problematic the associated Bubbles – the more unpalatably painful the bust is viewed in the minds of politicians and central bankers. Historically, it often became a case of “just one more bout of money printing to get us over the hump.” Just get through the pressing crisis and then it will be time to find monetary religion.
It is the nature of protracted Credit Bubbles that devastating busts are held at bay only through increasingly expansive monetary stimulus. Invariably, this corrosive process destroys the soundness of system debt and the underlying currency. Too often, a crisis of confidence in private debt incites a dangerous cycle of public Credit (“money”) inflation. Commenting this morning on CNBC, Dr. Bullard stated, “In monetary policy, you can never say you’re done.” This is precisely the nature of inflationism.
Dr. Bullard makes passing mention of Bubble risk: “The FOMC’s near-zero interest rate policy and the associated ‘extended period’ language has caused many to worry that the Committee is fostering the creation of new, bubble-like phenomena in the economy which will eventually prove to be counterproductive. One antidote to this worry may be to increase the policy rate somewhat, while still keeping the rate at a historically low level, and then to pause at that level.”
When I read (and listen) to such comments from our leading central bankers, I can only scratch my head and ponder the degree to which they appreciate financial and economic history – including recent financial crises. Dr. Bullard’s paper suggests that the Japanese predicament of long-term substandard growth is the worst-case scenario for the U.S. economy. It is more likely the best-case.
And I find myself increasingly frustrated by the ongoing “inflation vs. deflation debate.” With today’s low level of consumer price inflation, those arguing that deflationary forces are the paramount systemic risk now dominate policy dialogue. Most tend to be inflationists. Most argue for additional stimulus and see little risk in such activist policymaking.
I see risks altogether differently. We are in the late-phase of a multi-decade historic Credit Bubble. The greatest risk at this point is that massive issuance of non-productive governmental debt foments a crisis of confidence at the very heart of our monetary system. The top priority must be to ensure that such a devastating outcome is avoided – and at significant unavoidable cost. It is imperative that we as a nation come to the recognition that real financial and economic pain must be endured to protect the long-term viability of our monetary system. The inflation rate is not the key issue. And efforts to try to inflate our way out of structural debt problems are a lost cause. We must instead move forcefully to rein in our deficits and avoid further debt monetization in order to protect the soundness of our money and Credit – or else risk a financial crash.
Most regrettably, Washington policymaking (fiscal and monetary) is on a trajectory that will inevitably destroy the creditworthiness of our nation’s vast liabilities. With ominous parallels to the mortgage/Wall Street finance Bubble, Federal Reserve policies have fostered Bubble dynamics throughout our Treasury, agency and debt markets, more generally. Instead of market dynamics working to discipline Washington’s profligate debt expansion, Federal Reserve interventions ensure that a distorted marketplace again accommodates perilous Credit excess. Our central bankers should heed Mr. Trichet’s warning. Additional quantitative ease will only fuel the Bubble and risk calamity.
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