So, I’ve said it.
With Saudi Arabia in a diplomatic crisis with the US, Central banks all over the world entering into cross currency swap agreements with China, Europe’s stalling economies and a further increased demand in physical gold holdings we will see a decrease in foreign US treasuries demand in the coming months.
The FED will not allow that this decrease in demand, as an increase in interest rates of US treasuries will further lower expected GDP growth rates and ultimately destroy the fragile US economic recovery. This is because increasing mortgage lending rates will result in decreasing property prices and lower consumer spending. In the end will will see a Wealth Effect in reverse. To keep interest rates low the FED will likely increase QE and not taper in the coming half year.
It is not likely that the US government will cut spending’s and run a surplus within 2 years. Therefore the key question is, when will this increase in QE result in a spiral that we have seen so many times before in history?
PS. are the declining oil prices a silent diplomatic war between the US and Saudi Arabia? We all know that the governmental expenses of Saudi Arabia (keeping the population happy and pay for the 10.000+ princes) have increased so much that historic oil prices are likely to result in civil unrest.
Who owns the US debt?
For me, one of the most important items for predicting economic growth and future prosperity is a countries increase in ranking or position on the below mentioned table:
The Netherlands ranked 7th in 2010/2011 and decreased to a 9th position in 2012. Lets hope this has been a temporary decline.
Please have a look for yourself how the GIIPS are ranked compared to Germany, Netherlands, Austria, Denmark etc. This is Europe 🙂
I’ve talked about the Euro crisis with a lot of friends. Many know my strong feelings against the Euro as a political currency for many years. I always get the following question: “what I would do if it were me to decide which direction the Netherlands should take”. My strong suggestion has always been to exit the Euro and start a dual currency at first, where taxes and governmental expenses were collected and paid in the new currency. The current treaties do not say how such an exit should take place, they however do not oppose a country to exit.
Some economists suggest the best way forward is kicking the GIIPS out would solve the situation, this however would bring no solution to countries who have all their debt in the Euro currency. Their new currency would directly depreciate in value against the euro making repayment nearly impossible. (debt issued under local law would be eligible for conversion however).
Strong (hard) asset backing of the new currency would increase trust and therefore increase international acceptance of the new currency. It is likely that the new currency of the Netherlands will appreciate against the euro, this will have a positive effect on government debt repayment. International competition will likely decrease at first, but will likely return due to innovation and price/salary adjustments.
In time, the dual currency will be replaced by a single currency again, this can only be accomplished when cross liabilities with the ECB and other members have been cut. I strongly advice the DNB and members of parliament to start this process while we still can.
The old Romans already knew that it was up most important to keep the poorest part of the population happy. The roman writer Juvenalis (60-140 AD) already wrote panem et circenses. In his writings he used this phrase sarcastic, to show that the citizens were ignorant about the already declining status and importance of the roman empire in the world. As long as there were games and bread for free, the nation was “happy”. It seemed to him that the citizens were unable/unwilling to see the real problems.
The same can be seen these days. As long as citizens have entertainment (TV/Internet) and social welfare (food stamps / social housing etc.) politicians do not have to fear the population. But as soon as one of these historically secured “rights” disappear, the politicians have a problem. Yesterday in this has already happened on a very small scale when the US food stamp systems crashed. The Washington Post already indicated that if the debt ceiling would not be raised that “the Obama administration will have to decide whether to delay — or possibly suspend — tens of billions of dollars in Social Security checks.” I’m actually afraid of what will happen when the population do not have their “panem et circenses” any more…
It seems that the current American citizens have more in common with the roman citizens then they would think themselves.