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May 18, 2005

The ONLY Game in Town
by John Mackenzie

As the Dollar rises and Bond prices rise, foreigners are net sellers of government, agency and corporate paper... all the while securitization spins its greasy wheels.

Think about that... it is entirely upside down.

The Caribbean buyers, not offshore hedge funds as many suggest, but the Exchange Stabilization Fund has increased its purchases of Treasury paper by 31% to a record $137 billion. The degree of monetization out of the light of day must be staggering, Trillions upon Trillions.

There is far more Debt than is being reported. If you doubt this, please review our Governments own Balance Sheet and observe 'Unfunded Liabilities' for Medicare/Medicaid. There remains an $11 trillion shortfall on the books, and funded.

For the first time since August 2003, foreign accounts were net sellers of our Debt issuance; they balked and walked away.

Our promise tickets are being liquidated wholesale and everything must go.

Central Banks recognize the importance of financial stability for overall macro economic performance; while questions relating to the health of the financial system have seemingly played second string to those more directly linked to the process of inflation and growth of late. GDP is not a qualitative measure. When you're rigging the baseline metric for 'stability;' price becomes far more volatile. Prior to coordinated Central Bank monopolies, GOLD kept malfeasance in check as did SILVER.

And yes, the past was checkered with numerous problems; all were simply resolved by the 'Free Markets' making the necessary adjustments. At present we must wait on lagging data points which imbue Central Bankers to act.

A sickening hubris on display; unmatched in history. Blaming the Great Depression squarely upon a GOLD standard as Federal Reserve Governor Ben Bernanke has is ludicrous.

In recent years financial stability has found greater importance on Central Bankers agendas and policy statements; think back to the Dollars initial decline. The 'words' were of 'stability' and monitoring the performance of the financial sector and its relationship to the overall health of financial institutions. This effort was Global in nature, one that is clearly beginning to show signs of immense stress.

Preoccupied, Central Bank economists and policy makers have clearly dropped the ball. The failures accumulate upon their balance sheets and at the Bank of International Settlements. There is little evidence of 'stability.'

For the much vaunted changes made to the structural side, deregulation has enabled the financial economy to pursue global arbitrage opportunities for profit to extremes. Globalization and concentration have served the few, with cost immeasurable to the greater good so often cited as 'stabilizing.'

Deregulation has historically increased competition, but within the context of an Oligopolist framework, economists would argue this is beneficial to the whole, I would not. Frankly, I would suggest this very concentration of power creates a concentration of risks, unevenly spread throughout the globe. The greatest concentration being US$'s. it is clear now... Central Banks are turning away from the present dollar seignorage, hey have had their fill and will allow its demise.

The scope and scale of activity has increased the sheer size of the financial sector and has skewed its contribution to overall economic activity around the globe. This deregulated environment is a volatile one: failure is an all too obvious condition as the pursuit of profit has remained relatively unchecked. Witness the derivatives monster running unabated and unchecked, doubling last year in both notional OTC's and exchange traded. The underlying exposure so great it is untenable to suggest this is balanced 'stability.'

It is sheer insanity. The carry trades are the very basis levered to impossible heights, heights which can only topple and not be deconstructed if only through complete and total debasement of the linked currency, namely the United States Dollar.

The markets have become an aberration.

Central Banks, combating high inflation have clearly had a serious impact on the interaction between the real and financial economies, the distortions are too great to ever be managed through 'policy' and suggesting this is so remains the playground of hubris all to frequently displayed amongst our central planners. They are unable and unwilling to observe any instance in history where this has completed and resulted in anything resembling success.

Expanding macro economic uncertainty has forced a transfer of risks from natural market forces to a centrally coordinated command economy. This remains well under way and has been since the early 1980's. Cause and effect, time and scale have forced conundrum after conundrum upon convention.

And Alan Greenspan is baffled...

This is a global phenomenon; it is not limited to the United States.

Private sector complacency with respect to risks have been muted; the look over here 'sentimental' whispers of furtive hopes... an aspirational culture of greed and fear unwilling to look beyond today or tomorrow's promise.

This environment has certainly contributed to the massive accumulation of financial imbalances which will prove to be entirely destabilizing.

Presently, the imbalances are interacting between prevailing financial conditions and real economic activity which run counter to one another.

The business cycle has an important influence on incomes, profits as well as the balance sheets and creditworthiness of economic participants.

'Words of conduct' issued through Central Bank monetary policy failed to provide a foundation for long term macro economic stability and balanced growth. Cash flows are surreptitious in financial nature, witness GM, F, AIG, FNM, FRE and any one of the host of corporate kleptocracy's presenting a market for future cash flows.

The pursuit of price stability has been an abject failure. the pursuit of value is absent outside of the 'gold bug' community so inappropriately named for pursuing honest money, truth, moral codes of conduct and legitimacy in liberty. The truths of Statist duplicity were stated so clearly by the present architect of our demise, the Maestro of Malfeasance, Alan Greenspan.

The hubris displayed in 'managing' the stated policy of 'stability' would be laughable were it not so pathetic.

Moral hazard after moral hazard has been perpetuated; encouraged and spoon fed like bad religion and now we will pay the ultimate price for having forsaken fact, but adoring fiction.

Central banks, in influencing their macro economic objectives have keenly focused upon financial stability with very little regard for underlying and very real economy. They are concerned with their shareholders, not you nor I. Make no mistake about their intent, and it has not wavered for decades.

The truths are abundant and in fact:

Job creation is rapidly declining.

The world's reserve currency, the Dollar has fallen precipitously over the past three years against most currencies.

Real Incomes are declining.

Private investors are increasingly unwilling to invest capital within our markets.

The U.S. financial system is issuing debt as if there is no limit to how much can be absorbed.

Clearly, there are limits and we are witnessing the bounds by which our financiers are willing to stretch. At present it appears they have chosen to exit under the auspices of a 'double bind.'

One in which a coordinated attempt at exit is well under way, but at a point in the very near future one of our helping hands is going to blink and race for the exits. This will set off the avalanche of repudiation and debase the dollar and dollar denominated assets with an unimaginable horror.

It is best to prepare for the ensuing hyper inflation that will follow; it will not be contained between the U.S. Central Bank and its government much longer.

It will spill over and into the very 'price stability' the Central Banks have stated is job one.

John Mackenzie

John Mackenzie manages private capital - Email: m2jrmfl@bellsouth.net

Copyright © 2004-2005 John Mackenzie

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