Crowding Out

Crowding out

As outlined in an earlier article everything is pointing to a bubble in US Treasuries. Despite record issuance yields remain at record lows with 3 months bonds currently yielding 0.06%.

Meanwhile other top rated countries like Germany find it difficult to complete an auction for EUR 6bn.

German bond sale’s fate signals trouble ahead

The UK which is further along in the recession will have to refinance GBP 146bn this year, which will likely increase to provide for additional fiscal stimulus. With the lowest interest rates since inception of the Bank of England in 1694 and the GBP at an all time low this might prove to be difficult as well.

Oil and commodity dependent emerging economies will be faced with widening trade deficits with no way to finance. They (along with top creditor nations) will be crowded out by sufficient availability of US treasuries. This will keep the USD afloat vs. the Euro well into 2009.

However at some point there will be a move away from USD as there will simply not be endless demand as trade surpluses in USD creditor nations will be eliminated as the recession worsens.

U.S. debt is losing its appeal in China

What then? Where will all the money come from?

And the answer is, Helicopter Ben.

The Treasury will issue bonds and Ben will buy with freshly printed USD and everybody will pay for it through inflation. The economy has to be jump started through fiscal stimulus We are all Keynesians now, “We owe it to ourselves.”

My naïve point of view is that if someone fights fire with oil (further credit expansion, now on the balance sheet of the fed) this will not change the fundamental problems. Simply, there will have to be pain to purge the excesses which were forced upon us through Greenspan et al. Please see Austrian business cycle theory.