Wednesday 21 January 2009

World Demand Collapse, Bonds Next!

The US Fed can buy US treasury bonds directly if it wants, but that is effectively monetizing the debt. Even so, the US dollar has held up better than many people thought. But that cannot last indefinitely.

1 comment:

Guanyu said...

World Demand Collapse, Bonds Next!

By Chris Laird
15 January 2009

Anyone following the economic news in recent months has to be stunned at the declining economic activity. Japan had a 16% drop in machine orders for November. US car sales down 30 to 40%. Even world car leader Toyota has sales down 20 to 30%. Worldwide car sales are way down too, anywhere from 10 to 20% depending on which area. US retail sales are down 2 plus percent, but depending on what stats you look at, autos -30% plus, that 2% number is far worse than it looks.

The EU region is seeing marked declines in orders and exports. Japan had a stunning 15 to 17 % drop in exports from the previous year. China had over 100,000 factories close by end of 08. The list is endless.

Of course all this collapsing demand is hitting commodities and energy. Gold has fared better overall, but is torn between central bank inflation efforts and deflation in general in every major economy. Even China is said to see possible flat growth in 09, something that they consider akin to Armageddon, as they need 15 million new jobs each year just to stay even with population growth.

World credit is mostly unavailable. Banks won’t lend and despite the bailouts of $2 plus trillion (really $8 trillion for the US alone depending on how you add up the numbers) of capital infusions, it’s said they need another $2 trillion just to get solvent. Mostly what the Central banks have done is to shore up the banking system but it’s far from functional. Since credit is so hard to get (for everyone, people, businesses, even municipalities) there is little reason to expect the US to recover soon. In fact, the continual calls on the popular financial media that we are bottoming is beginning to sound very hollow.

And, if the US is not likely to recover soon, no one else will either, and it’s really more like a world economic death spiral. Deflation is lurking out there.

The US Fed and Treasury have committed over $8 trillion and counting to various shoring up efforts, and the ECB another $4 plus trillion in various ways to prevent their own total banking implosion. Germany just had what’s called a failed auction of German Bunds (their Treasury bonds) last week, selling only about 79% of the issue. While not a disaster, that means that the world is tiring of all the new lending at such low bond rates. The biggest shoe to drop would be the US Treasury market if it ever loses enough buying interest and US interest rates start to rise on their own.

The US Fed can buy US treasury bonds directly if it wants, but that is effectively monetizing the debt. Even so, the US dollar has held up better than many people thought. But that cannot last indefinitely.