Page 2 of 2 DOLLAR CRISIS IN THE MAKING
Before the stampede
By W Joseph Stroupe
massive second wave of damage and destruction in this present crisis, and an
eventual burst in the Treasuries bubble.
The emerging markets and their banks and governments are suffering under
increasingly tighter credit strangulation and mounting financial and economic
losses, with skyrocketing risks of default, due to the tightening global credit
seizure. And US and European commercial credit not explicitly backed by
governments is also suffering likewise. As if that dangerous situation were not
bad enough, the massive spending and debt issuance policies being embarked on
by the US government only greatly exacerbate
the increasingly unstable situation for all these players.
By facilitating and encouraging the massive global flight into Treasuries, and
by issuing a huge new supply of US sovereign debt, emerging markets, their
governments and banks, and US businesses are deeply suffering. As the US
government sucks all the air out of the global credit markets via the unstemmed
growth of its latest in a series of dangerous asset bubbles, namely the
Treasuries bubble, these other entities find it extremely difficult to issue
debt (obtain credit) at feasible costs, if at all. Investors are demanding very
high yields to exit the relative "safety" of Treasuries to invest in corporate
and government bonds in the emerging markets and in large swaths of the US and
Western Europe as well.
These increasingly high yields demanded by investors translate into high costs
and mounting losses by banks across the financial system. The situation is
moving rapidly to a potential massive wave of bank, corporate and government
defaults. Eastern Europe is on the very precipice as a result. If such already
severely weakened emerging market governments, banks, businesses and US
corporations do default, they will place enormous new pressures on European and
US banks which are either heavily exposed, or not sufficiently immunized, to
the risks.
The global credit markets and financial systems are deeply interconnected,
meaning that contagion spreading from an Eastern Europe default to the rest of
Europe and the US is virtually assured. So those pressures will be felt by the
entire global financial order, and such new and profound stresses upon an
already extremely shaky order won't likely be endured without a genuine
meltdown of the entire system.
These huge and dangerous distortions in the global financial order are due
largely to US government policies regarding Treasuries and the shortsighted
willingness of global investors to participate in pumping up that profoundly
harmful bubble. If the US succeeds in selling its greatly increased supply of
Treasuries, then such distortions in the global order will only become more
profound, their negative repercussions (credit strangulation) will only become
much more potent, and the feared second wave will be virtually assured. And so
far, demand for Treasuries has remained high, thereby ensuring the dangerous
persistence of the credit strangulation referred to here.
That second wave, if it comes, will also carry profoundly negative
repercussions for the Treasuries bubble itself, because the US and Europe will
be plunged into undeniable, full-blown depression via a financial meltdown by
the heavy burden of the cascading effects of default in Eastern Europe. That
eventuality will force global investors to finally begin to evaluate the safety
and appeal of Treasuries and the dollar based much more on the swiftly
disintegrating fundamentals of the US economy and much less on a psychological
reflex, driven by extreme risk aversion, that at present corrals investors into
Treasuries for their supposed safe-haven benefits.
The stampede in the making
Investors will begin to stampede out of financial assets such as Treasuries and
into hard assets like precious metals and certain commodities whose price has
been severely beaten down. These will offer comparatively much safer stores of
wealth, ones with a real profit potential. China, via its resource buys, is
already blazing the trail, going energetically into hard assets, rather than
sustaining its 2008 rate of purchases of Treasuries and other financial assets.
Replay the recent histories of the chaotic housing and the commodities bubble
bursts. Global investors, at the behest of enthusiastic governments, largely
ignored the inevitable risks and piled into these assets on a grand scale, with
the hottest interest coming just before the burst occurred. The environment of
very low global interest rates and a massive global credit excess set the stage
for enormous investor profits on these gigantic and mushrooming asset bubbles.
But when mounting inflation obliged the Fed to begin to steadily hike interest
rates, the housing bubble began to burst in late 2006. As the dollar weakened
under mounting inflation and loss of its appeal as a safe store of wealth,
global investors piled ever faster into commodities for safety and for profit,
inflating that bubble to gigantic proportions by the summer of 2008, when oil
nearly reached $150 per barrel.
Then, when the global recession emerged later that summer, investors realized
global demand and prices for commodities would plunge, so they stampeded out of
commodities and into Treasuries, and the commodities bubble burst. Both bubble
bursts left a great deal of wreckage in their wakes, with asset values
collapsing, pulling businesses, banks and even governments into the abyss.
Though the present Treasuries bubble is more about safety than it is about
profit, the fundamental risks associated with bubbles still apply to it. The
bigger it gets, and the more reliant upon it as a safe store global investors
become, the more unstable it turns out to be because it becomes more sensitive
to various factors, both internal and external, both real and psychological.
The bigger and hotter any bubble gets, the more prepared its devotees become to
speedily abandon it in favor of the next one. That explains why investors have
mostly piled into very short term Treasuries - they know they may well have to
sell out even faster than they bought in.
So, no one should assume that the present crisis will moderate or move toward
resolution just because global demand for Treasuries might remain high in
coming months. That would only signal that the Treasuries bubble is growing
more massive, and that the distortions in the global financial order are only
becoming more profound and dangerous, threatening to bring in a second wave of
destruction, and that the bubble is therefore much nearer to bursting. This
constitutes a potential perfect storm against the dollar and against the
present global financial order that no one wants, but no one is seeking to
prevent either.
W Joseph Stroupe is a strategic forecasting expert and editor of Global
Events Magazine online at www.globaleventsmagazine.com
(Copyright 2009 Global Events Magazine. All Rights Reserved.)
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