Posts Tagged ‘Treasury bond’

The new defensives- drugs & health care

Thursday, October 1st, 2009

Conventionally, if investors want to be at the most ‘defensive’ (i.e. not take any risk) for their investments, there are no better places than US Treasury bonds. The US is the keeper of the world reserve currency and their Treasury bonds are backed by the full faith and creditworthiness of the US government. By definition, the US government can never default on its debt because it has the full powers of taxation on its people and as a last resort, crank up the monetary printing press of the world’s only reserve currency. In other words, the US Treasury bonds are the safest ‘cash’ an investor can ever get.

But the problem is, under the colossal weight of debt that the US government is going to face (see How is the US going to repay its national debt?) and the commitment of Ben Bernanke towards the idea of debasing the currency (see Bernankeism and hyper-inflation), the safest of ‘cash’ is no longer safe in real terms. The US government cannot technically default on its debt because it can always print money and repay them in continually depreciated dollars. The Chinese government are acutely aware of this (see Nations will rise against nations) and are earnestly diversifying their safest ‘cash’ into other forms of store of wealth. With interest rates effectively at zero (which is below the rate of price inflation) and likely to stay there for a considerable period of time (see Marc Faber vs Steve Keen in inflation/deflation debate- Part 2: Marc Faber?s view), even risk-adverse savers are forced to speculate if they want to preserve the purchasing power of their savings.

So, we have this ironic situation that the most risk-free investments (US Treasury bonds) are actually very risky (currency depreciation through debasement). For US-based investors, Marc Faber reckoned that they are better off risking their wealth in defensive stocks than risking it in ‘cash.’

The question is which sector is defensive?

One sector that Marc Faber has in mind:

Changing the rules of the game

Monday, December 15th, 2008

Next year, the US government needs to borrow US$1.5 trillion to pay for its expenditure. Up till the end of November 2008, $4.16 trillions worth of spending programs were endorsed by the US government to bail out Wall Street and stimulate Main Street. There are rumours that the upcoming President Obama will sign in a trillion dollar economic stimulus package when he takes office next month.

Not too long ago, hundreds of millions of dollars were an unimaginable sum of money. After a while, the concept of million is replaced by the billion. Today, trillion supplanted the billion. How much money is a trillion dollars? Imagine you have a stack of US$1000. For that stack to reach $1 trillion, guess how high it has to go? The answer is: 109 kilometres! By comparison, the earth’s atmosphere is only 120 kilometres.

As we mentioned before in How is the US going to repay its national debt?, the US national debt stood at more than $4 trillion at the beginning of this year. With all these extra spending programs, bailouts, rescues and stimulus, it could easily more than double.

So, where is the US government going to get the money from? Will the Chinese, Japanese and Arabs be kind enough to lend them? Probably not, because the US government still owe these foreigners trillions of dollars of outstanding debt. Will they borrow from the American people? No, the American people are too deep in their own private debt to spare a dime. Will they tax the American people? No, because the US government want them to spend in order to ‘stimulate’ the economy. The only to do so is to shower them with even more money.

That leaves only one option- print money. The traditional way to do so is for the government to issue Treasury bonds to the Federal Reserve, which in turn conjures up the money from thin air to pay for them. But even then, at the rate at which the tide of financial destruction is going, the government cannot print fast enough. After all, there is a legal limit on the amount the Treasury Department can borrow. To break that limit, it has to seek the permission of Congress.

Is there a way to break tradition? In this recent Wall Street Journal article, it reported that the…

… Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

It isn’t known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn’t explicitly permit the Fed to issue notes beyond currency.

Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up with new ideas.

So, they are thinking of new ‘ideas’ to change the rules of the game in the middle of the session? Remember what we wrote in Recipe for hyperinflation:

One thing we have to be clear. Assuming that the ?rules? are strictly adhered to, there will only be one outcome for the current credit crisis: deflation.

Since the current structure of ?rules? will be too restrictive in such a war against deflation, there will be popular momentum towards the bending and rolling back of these ?rules.? If they press on relentlessly till the final end, there can only be one outcome: the US dollar will be joining the long list of failed fiat paper money in the annals of human civilization.