Full Faith and Credit, Too…

By J.M. Hamilton (4-30-11)

Americans, per a recent NY Times/CBS poll, indicate that the country is headed in the wrong direction, and apparently S&P feels that the dollar is headed in the wrong direction, too.   But fear not, Secretary of the Treasury, Mr. Tim Geithner, assures us all that there is “no risk” of a U.S. down grade, from its gilt edged AAA rating.  This assessment by the Treasury Secretary would either make him omnipotent or extremely knowledgeable about the rating agencies’ inner workings and politics.  My guess is it is the latter.

Mr. Geither’s assurances remind me of CFO’s I have run into over the years, particularly those who have run financially troubled organizations.  Now this particular brand of CFO must be ebullient with his creditors and suppliers, assuring them all is well and the company on the mend, and please keep the supply lines and credit flowing…. Lest said creditors and suppliers bolt, and send the whole enterprise into bankruptcy. 

Or perhaps Secretary Geithner is merely planning, like any good CFO, to pull any number of accounting maneuvers, that the Wall Street Banks regularly perform, upon the U.S. budgets, her deficits and debt.  Mr. Geithner might execute a Repo 105 and send debt to another country, when the CBO or the President’s accountants get ready to perform their fiduciary responsibility.  But that could get expensive, maybe Mr. Geither creates a special multi purpose vehicle and dumps the debt off the balance sheet, but off balance sheet accounting is already in play.  Mr. Geither could enlist his friends at Goldman to obscure debt with CDS and derivative products, a la the products Goldman Sachs sold Greece to gain E.U. admittance.   Mr. Geither could consult with the front runner for the European Central Bank’s top post, Mario Draghi, a former Goldman Alum, on how exactly the process might work.  Or perhaps the U.S. could like, Bank of America, create a bad bank, or “bad U.S.A.,” and dump all the problems in a company that basically is a shell for failure?   Why not a finite or reinsurance transaction to make accounting problems disappear, like those deployed by AIG and General Reinsurance? 

Thanks to FASB and lax regulation the options are limitless.

And with the Fed purchasing U.S. debt nearly as fast as the Treasury issues debt, via quantitative easing, who needs to worry about militant bond vigilantes who might demand reform and higher interest payments?

Certainly not Mr. Geithner who recently offered his commitment to a strong dollar, when he said: “We will never embrace a strategy of trying to weaken our currency to try and gain economic advantage.”

Amazing.  And so, it is.

That is of course, until countries begin to lose faith in the dollar.  For what is the dollar and what gives that piece of paper value?  The dollar’s value stems from a belief and faith that its value today and ability to purchase goods and services will be of like or similar value tomorrow.  When that faith erodes, usually during highly inflationary times, when printing presses roll non-stop, the dollar’s value plummets. 

It gives you some idea of how bad things are with the dollar, when a shell shocked euro – complete with its own sovereign debt problems and all the incumbent potential for default – is in its ascendancy against the dollar.

But what do the Wall Street banks care if inflation heats up?  They basically enjoy the equivalent to an endless flow of monopoly money coming from the Fed funds window at just a little over zero percent interest.  And as more than one economist has observed, as well as this blog, Fed policy seems focused and centered upon keeping the Wall Street and European Banking cartels happy and above water.  The Fed is not only the U.S. bank of last resort, but it is also would appear to be the E.U.’s, but that just comes with running the world’s fiat currency.

The relationship between the mega-banks and government is both symbiotic and well established.   The Wall Street Banks played a significant role in the creation of the last financial crisis, and both Republican and Democratic administrations bailed them out, and effectively transferred many of Wall Street’s liabilities and toxic assets from the private sector to the public sector, via QE1, and a whole raft of programs (TARP, TALF, Et Al.) and special breaks.  Despite all of the aid and assistance, many of the banks, even though reporting profits, still have not turned the corner (weighted down by unrecoginzed problem assets, such as sovereign debt and/or real estate).  Meanwhile the general public is feeling the results of quantities easing with rapidly increasing inflation, at a time when their home value, if they still own a home, is in free fall. 

And what does the government get out of propping up the banks?  Well, they get compliant banks facilitating the financing of national debt, and an endless stream of campaign and political contributions, as long as a pol falls within the correct side of the political divide.  

So what could cause Americans, indeed the world, to lose faith in the almighty dollar?   Well, not that this blog is wishing for it, because the effects of a toasted dollar would probably feel a lot like, well, Armageddon.  That is to say, economic activity would plummet, there would be capital flight, hoarding and rising unemployment, international trade would be rocked, endless negotiations and threats of war -  as creditor nations demanded to be made whole, and a prolonged period of economic shock, dislocation, and stagnation, as a new currency is installed or an existing currency takes over the dollar’s role.  And unlike the rest of the world, who can depend upon the U.S. and the IMF for support during troubled times, who would the U.S. lean on in the event of fiscal and monetary crisis?  

What could cause such an event?  Any number of factors or a combination of factors, not limited to:  China creating a middle class, a self sustaining economy, and no longer dependent upon dollar driven exports; the refusal of the Middle East to accept payment in dollars for the oil trade; a sovereign debt crisis compounded (read the E.U. and/or U.S. state and local governments), replete with another round of bank bailouts; systematic risk or a chain reaction triggering payment of any sizable percentage of the under secured and under collateralized CDS and derivatives market; rising global unemployment, and resulting anarchy and possible revolution. Global war.  Soaring food prices and famine.  Gee, come to think of it, many of these processes are in play presently.

And what would replace the dollar?  Some economist argue a new global currency would replace the dollar, and others have argued that before the dollar was too far gone, it would form a monetary triumvirate  with the Euro and the Renminbi.   The question is how would sovereigns, like the U.S., surrender both the power to print money, and fiscal power and authority, that is to say, the ability tax and spend?

Don’t laugh.  There is a great fiscal and monetary science experiment underway presently in the E.U. that could be the template for future global monetary union.  How the euro survives, and how the Fed and the  E.C.B. manage the competing interests of many disparate nations, very well could signal how quickly the dollar falls from grace or joins up with the Euro and the Renminbi to form a new international monetary order.  Businesses, too, may eventually support a universal currency, or basket of currencies, so as to protect profits from hyper inflation, and in order to save money on global currency arbitrage and profit repatriation.  The ramifications of such a specie union or creation would be vast, but one thing is for sure, the international banking community would work to manage, capture, and infiltrate such an enterprise from the beginning. 

So while an international central bank might be just what the world needs to rein in and control multi-national banking and too big to fail banking institutions, more than likely such an entity would be co-opted from its genesis.

In the interim, try not to lose faith... the Treasury Secretary offers great assurances.

P.S.  Not only does Wall Street have an axe to grind with the Democrats and Dodd-Frank, but Big Oil and speculators maybe doing all they can do to unseat President Obama in 2012, via the power of the pump.  Stay tuned.