A
run is a
mass withdrawal of cash funds
from a borrower. We are in the midst of a continuing worldwide credit crisis, punctuated by "runs"
of varying prominence and
publicity.
These runs
are rational, not panics and not due to quirks of psychology. They occur when investors
realize that their funds are endangered in an institution. They
try to get them out before they lose them.
The
danger comes when the institution
no longer is getting cash inflows in sufficient amounts to pay off all its obligations. In
businesses, this comes
about through sour investments. In governments, it comes about through wasteful spending that fails to be recovered
in tax revenues.
In
the year 2008, we saw runs on major Wall Street investment banks, money market mutual funds, domestic banks and foreign banks. Now we
are seeing runs on governments in Europe such as Greece and Portugal. Sovereign debts are being sold down hard as investors flee from them,
converting their bonds into currency.
Three years from the 2008 credit crisis, the Federal Reserve is still providing
massive credit to U.S. banks.
This props them up against bank runs. Every so
often, the FED extends credit to foreign central banks to prop them up so that
they can prop up their financial institutions. These
are stopgaps. All of this
propping up depends on faith in one currency: the U.S.
dollar.
Runs on various
institutions often show up as a flight into short-term U.S. treasuries, i.e, the dollar.
This is because the treasury market is deep.
Since the dollar is
also a credit instrument,
it is subject
to credit risk. What happens when trust in the dollar drops sharply?
What happens to all these financial institutions being propped up by creating dollars when trust in
the dollar fails? That is
when the financial system
cracks wide open. That is
when governments will be tempted
to freeze funds in banks and prevent withdrawals the way that Argentina did. That is when the FED will be tempted
to guarantee almost any institution against cash withdrawals, but when such a guarantee
will be ignored. That is when gold will soar in price against the dollar and all other
fiat currencies.
I
am describing a run on the United States government.
This will be a withdrawal of cash financing from the U.S. government. This is the ultimate credit crisis upheaval. This will be accompanied by mass social unrest and political reorganization. Stock and bond prices
will fall sharply. The S & P 500 will
lose at least 60 percent.
Government bonds will yield at least 10 percent. This
event is foreseeable. It is also avoidable, but not without much pain and travail. Hence, although foreseeable and avoidable, it may still
occur.
Whether we like it or not, we are all currency speculators now. This is hardly a burden
we can relish.
Whether or not a run
on the United States government occurs
is in the hands of its creditors. It depends on their trust in the dollar. Their
trust depends on their understanding of America’s
political economy.
Anyone who
looks objectively at
actions being taken by
the U.S. government to bolster
its credit or cause its credit to deteriorate has to reach a very negative conclusion. Why? Simply because
the country’s leadership has been taking it downhill
for decades on end. America
is like a bright and fresh red apple in which rotting has been proceeding inexorably. The apple still has some edible portions but large
parts of it are gone. The seeds
need to be planted and a new tree grown.
Dagong Global Credit
Ratings Co. Has 15 categories of ratings of sovereign debt (AAA, AA+, AA,
AA-, A+, A, A-, BBB, BB+, BB, BB-, B+, B, B-, CCC.) The U.S. has a rating of
A+. Dagong lowered it from AA- to A+ in November 2010 after the FED announced a new QE program.
In
a remarkable statement
made in mid-June 2011, Dagong’s president said "In our opinion, the
United States has already been defaulting."
Dagong has spent $1
million to enter the U.S. market, but the SEC has so far turned it down.
The
debate over the debt ceiling, like all Washington debates, is throwing
off negative signals
about U.S. credit. Obama is
the key person. He is airing various
proposals in public in press
conferences. If he were serious about any of them, he’d be working closely with key Congressmen
in private behind closed doors. He would not be trying to box in Republicans or
embarrass them in public
or score political points. He would
have been working on controlling
the budget long before this.
He would have shown
leadership on this long ago.
One does not place multi-trillion dollar proposals on the table and expect
them to be taken seriously, debated and acted upon within 2 or 3 weeks. Obama’s credibility on serious budget
control is nil. The Republicans and even members of his own party have little reason to trust him when he paints
himself as on a high road
and willing to compromise. Any
compromise will be on his terms to further his agenda. The debate, such as it is, can’t
be taken seriously.
Did the near-miss
of the 2008 credit crisis
prod the U.S. government into corrective action? Sure, bailouts
and wars and deficits and
the absorption of Fannie Mae. The U.S. government
has had three years to enact measures to revive the economy,
clean out the bad debts
in the banking system, and get
the U.S. budget under control. Make
that thirty years or more. At this moment, I can’t think of one good step it has taken. Look for yourself. Do I see healthcare in there as the centerpiece along with Wall Street reform? Don’t make me laugh.
The
U.S. government has no credibility
in terms of restoring America. The government is living off its past reputation, like a once great entertainer grown tired and going through the motions.
Under
these conditions, trust in the dollar and all the other fiat currencies that are linked to the dollar will continue downwards.
Unless there is a change in these conditions, someday there will be
a run on the United States government.
I see nothing that suggests a change in these conditions.
Michael S. Rozeff
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