This
morning, the United States Treasury Department issued a press release that
constituted the Treasury Borrowing Advisory Committee’s (TBAC) report
to the Secretary of the Treasury. TBAC membership is derived from senior
members of the Securities Industry and Financial Markets Association. These
would be the proverbial foxes advising the chickens - a favorite Midas Letter
theme.
This group forms the
consulting connection between the U.S. Treasury and the investment industry
who is tasked with finding investors for U.S. debt so that the behemoth debt
machine can continue its primary function of maintaining the United States standard of living at the expense of foreign treasuries.
Remarkably, the
foreign treasury managers have either not yet caught on, or are duplicitous
in maintaining the illusion of a sustainable deficit government that would
swallow the global GDP of several generations should it ever be called for
repayment.
This group meets in
closed conference in a hotel in downtown Washington, and the Treasury lays
out what it needs, and the TBAC tells them how they think it can be done. What
is interesting in the published minutes of the meetings is that it now is
apparent that both sides are concerned solely with rolling out new and
modified debt instruments in increasing quantity to service the debt
requirements of the nations future spending requirements. Servicing current
debt is barely mentioned, though one might deduce that those requirements are
incorporated by default into future borrowing figure requirements. (The
following quotes are taken from the press release)
“The
deterioration in the budget outlook, combined with expenditures associated
with the TARP, potential FDIC guarantees, and expected additional stimulus
spending have increased private forecasts for total funding needs of the U.S. government for fiscal year 2009 to approximately $2 trillion. This is likely to stress
the existing auction schedule and consequently warrants tangible adjustments
to that schedule.
Faced
with an unprecedented increase in net borrowing needs, the Treasury in its
first charge to the Committee sought our advice and recommendation on changes
to the auction calendar for debt issuance.”
The strategy for
financing the new debt required for the TARP (Toxic Asset Relief Program)
purchases and the stimulus packages calls for the expansion of debt
instrument auctions across the entire maturity spectrum:
“Faced
with such extraordinary financing needs, the Committee focused on the optimal
potential size of each coupon issue, while not jeopardizing a successful
auction process.
It was
the Committee's recommendation that existing monthly 2-year and 3-year notes
could be increased by $5 billion in size, to $45 billion and $35 billion,
respectively.
Furthermore,
the Committee recommends that monthly 5-year notes have the greatest room for
expansion given their liquidity and focus and should be increased by as much
as $10 billion per issue. This would bring the monthly issuance size to as
much as $40 billion.
And
lastly, the committee recommends that the Treasury increase the size of the
newly issued quarterly 10-year notes by $5 billion and by $4 billion when
re-opened the two months following the new issue. In other words, the sizes
of the 10-year issuances would increase from $20 billion, $16 billion and $16
billion each quarter to $25 billion, $20 billion and $20 billion,
respectively.”
What a brilliant
solution! In the absence of demand, and abundant supply, issue more supply!
Significantly, the
estimated spending requirement for 2009 has, in the estimation of this
committee, now ballooned to $2 trillion, and the stipulation is made that a
similarly grotesque figure will be required for 2010.
“The
net supply of Treasurys in 2009 and 2010 combined seems likely to total more
than $3 trillion and could climb as high as $4 trillion. The Congressional
Budget Office (CBO) estimates the 2009 Federal budget deficit to be $1.2
trillion. The consensus of private sector analysts is similar to that figure.
Yet, neither the CBO estimate nor the private consensus reflect fully the
funding needs associated with the Obama Administration's fiscal stimulus
plans, the implementation of TARP (or another TARP-like program), or the
rumored creation of a bad/aggregator bank to help deal with the
underperforming assets weighing down financial institutions. Some of the
funding of these government programs will spill over into 2010, a year in
which the "core" budget position also will be weak according to
mainstream expectations for economic performance.”
Importantly, the
committee acknowledges for the first time that China will likely be a less
reliable sucker for the continued sale of the expanding sea of U.S. debt instruments:
“China, on the other hand, could slow its accumulation of dollar-denominated debt. Such a
trend already has begun to develop with respect to its accumulation of
overall dollar assets as the flow of private capital into China has cooled alongside the global downturn, alleviating the need to offset capital
inflows.”
And, in apparent
support of the argument for diminishing demand for U.S.Dollar-denominated
junk debt, the committee suggests that having a bigger “primary dealer
community” would bolster the odds against future auction failures. The
solution appears to be to hire more salesmen.
And finally, a
larger primary dealer community would help to reduce on the margin the
possibility of an undersubscribed auction(s). There currently are just 17 primary
dealers, down from 30 a decade ago. Government bond trading desks at the
dealers also are not immune from sector-wide capital/balance sheet issues and
desks at many dealers are being encouraged to minimize risk.
What an operation!
How can this charade be allowed to continue? The only explanation, and its
glaringly obvious, is that nobody, from the executive administration level
down to Joe the Plumber, is willing to step up and be first to pull the plug
and the artificial standard of living we’ve created for ourselves at
the current expense of foreign treasuries and at the future expense of our
progeny.
What a sad statement
as to the integrity of the human race.
But, whatever. We
can't afford to sit around and pity ourselves just because we allowed the
thieves of Wall Street and Washington administer this unlubricated broomstick
to our collective backsides.
The only intelligent
thing to do, and yes I do believe there is a "stuck record"
frequency developing here, is to buy gold and silver. This $4 trillion
hallucination on the part of the United States financial mismanagers is
directly dilutive to the the value of any currency issued by that bankrupt
nation, and is therefore a natural exponential driver for the gold price.
Gold bullion, gold
mining shares, and for maximum upside (with correlated risk) gold juniors. If
you choose NOT to participate in gold, you will have no one but yourself to
blame for the splinters you'll be plucking out from your derriere that have
"In God We Trust" printed on them.
James West
www.midasletter.com
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