National Debts and Stimulus Package

The 780 billion Stimulus package has passed two political branches and signed into law. No matter how any one touts  the packages, the essence of the package is still debts - using new debts to pay for old debts. It never gets debts paid off or even shrinks it, in this case, only expands the total debts that the American people, the next generation and their next generation will have to bear. Thus, it impoverishs the generations ahead and dims the future of real economical recovery.

Wall Street uses this quiet time to cast a scene that market bottom would be seen. But it would not. The inflationary monetary policy is an even bigger financial time bomb, it will trigger the more severe crisises in the years ahead of us. This time, it will be US dollar run or forex run. It will be insurance run. It will be bank run. It can be predicted that forex control will be enforced and bankng holidays declaired.

To contain the impact of this inflationary policy, the debts should not be circulated in the US alone, for it will forfeit the purpose of printing money because of fastened inflationary rise reduces people's purchasing power. The debts have to be absorbed by foreign investors. Then any one look around, which countries will be able to continue absorbing this and coming humongus treasury sales? The answer is pretty clear, it would be China. But what incentive would China continue to load up the debts knowing it is facing a USD demises down the road? So the only explanation is the move will be political to provided the trade relation. At certain point that US will be unable to expand the consumption economy and political head wind gets strong and/or the abusements of US governments on the reserve currency status, the buying will cease to exists.

For now, Chinese government will demand higher interest rate on the bond sales.  The interest rates on those bonds and bills will have to rise. Long bond interest is already the bottom of the cycle with the cycle runs another ten to fifteen years (if USD could even survive that long).

After this secular bear market rally, realities will set in. The market will tank to bring DOW/Gold ration to 1:2-1:1 in the years ahead. Just be prepared.

p.s. Bill Gross of PIMCO casted a long shadow on USD on March, 09 commentary:

Question: Why do we assume that the U.S. can unilaterally do whatever it wants?

Answer: Much like we are the world’s strongest nation militarily, we entered this crisis with certain economic and financial strengths relative to all other nations. Our reserve currency status was the primary one which means that we can write checks in our own currency and they are accepted all over the world – sort of like American Express Travelers Cheques. This privilege, however, can be and is being abused. Travelers Cheques are acceptable only when redeemed at 100 cents on the dollar. Lately, quasi-American dollars in the form of Aaa CDOs, corporate bonds, and even national champion bank stocks have floundered closer to zero than par. There is fear on foreign shores that even U.S. agency debt may not be honored and that U.S. Treasury debt itself, when “repoed” as in prior years, may now suffer from counterparty risk. Global willingness to accept American dollars is being tested. Granted, the U.S. currency has appreciated strongly against its counterparts during most of this crisis, but technical short covering as opposed to a flight to quality may have been the dominant consideration. Watch the dollar. If it falls hard, there may be nothing policymakers can do to restore the ensuing financial chaos.

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Well said warning. We shall see it shortly in next couple of years.