Montag, Mai 25, 2009

The Most Egregious Error Imaginable...

An editorial in Sunday's FT points to the fundamental error that will destroy the Obama Administration and put it clearly into the field of "failed Presidents", or at least those who don't enjoy much good press.

Bluntly, the real problem with the running up of the debt that the Obama Administration and the Democratic Congress is not that it will take decades to repay, putting a clear financial cost of future generations, but rather that those in the White House and Congress are playing with something so fundamental that only a complete fool and total idiot would mess with: US credibility as a financial safe haven.

To quote:

The US has long exploited its position as the supplier of the world's reserve currency, running up enormous debts which no other government could sustain. But there may be a limit to what even the US can get away with....Indeed, the US debt stock is higher and its deficits will remain larger for longer. Owing to the strictures of the US political system, the executive will find it harder to ram through any kind of emergency fiscal retrenchment. It is not obvious from the bond markets, where prices do not indicate the fear of runaway inflation. But be warned: currency traders are pricing in the tail risk that the US will be forced to resort to the printing press.

In other words, this isn't something that might happen, something that policy makers will have to consider, something that will impact decision making in the future, but rather something that is already happening. Do you understand this? The market, in all its ruthlessness and uncaring precision, has already decided that things are going downhill from here: if the US currency takes a nose dive - as it is being pushed to by the policies of the Obama Administration, either deliberate or via folly - this will have a massively negative effect on the position of the US dollar as safe haven. Up to now, no US administration would even contemplate changing this.

Playing with the creditworthiness of the US is plain flat-out stupidity. The Obama Administration seems to have plenty of that.

But it's worse than that: it looks like the Obama promise, of change, is turning out to be radically different than anyone who voted for them ever thought. It's going to be change for the worse, not the better. No one outside of the financial community knows what it means if the US were to throw away its financial rating in the name of some half-assed policy - per definitio, anything that would negatively impact the US financial rating is a bad policy.

Change here will be devastating and will lead to a new world order, one that is clearly not in the interests of the US.

But the Obama Administration either doesn't seem to care, or, even worse, seems to think that this is just fine.

One further step on the road to perdition. This is not speculation: if currency traders are pricing in this risk, it is because they see it happening. Lose the currency traders and you lose the currency. Period.

Watch to see who profits from this and who they supported before the election and thereafter: this is YADP (Yet Another Data Point)...

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