The $4 Trillion Hallucination Driving GoldThis morning, the United States Treasury Department issued a press release that constituted the Treasury Borrowing Advisory Committee's (TBAC) report to the Secretary of the Treasury. TBAC membership is derived from senior members of the Securities Industry and Financial Markets Association. These would be the proverbial foxes advising the chickens - a favorite Midas Letter theme.
This group forms the consulting connection between the U.S. Treasury and the investment industry who is tasked with finding investors for U.S. debt so that the behemoth debt machine can continue its primary function of maintaining the United States standard of living at the expense of foreign treasuries.
Remarkably, the foreign treasury managers have either not yet caught on, or are duplicitous in maintaining the illusion of a sustainable deficit government that would swallow the global GDP of several generations should it ever be called for repayment.
This group meets in closed conference in a hotel in downtown Washington, and the Treasury lays out what it needs, and the TBAC tells them how they think it can be done. What is interesting in the published minutes of the meetings is that it now is apparent that both sides are concerned solely with rolling out new and modified debt instruments in increasing quantity to service the debt requirements of the nations future spending requirements. Servicing current debt is barely mentioned, though one might deduce that those requirements are incorporated by default into future borrowing figure requirements. (The following quotes are taken from the press release)
"The deterioration in the budget outlook, combined with expenditures associated with the TARP, potential FDIC guarantees, and expected additional stimulus spending have increased private forecasts for total funding needs of the U.S. government for fiscal year 2009 to approximately $2 trillion. This is likely to stress the existing auction schedule and consequently warrants tangible adjustments to that schedule.
Faced with an unprecedented increase in net borrowing needs, the Treasury in its first charge to the Committee sought our advice and recommendation on changes to the auction calendar for debt issuance."
The strategy for financing the new debt required for the TARP (Toxic Asset Relief Program) purchases and the stimulus packages calls for the expansion of debt instrument auctions across the entire maturity spectrum:
"Faced with such extraordinary financing needs, the Committee focused on the optimal potential size of each coupon issue, while not jeopardizing a successful auction process.
It was the Committee's recommendation that existing monthly 2-year and 3-year notes could be increased by $5 billion in size, to $45 billion and $35 billion, respectively.
Furthermore, the Committee recommends that monthly 5-year notes have the greatest room for expansion given their liquidity and focus and should be increased by as much as $10 billion per issue. This would bring the monthly issuance size to as much as $40 billion.
And lastly, the committee recommends that the Treasury increase the size of the newly issued quarterly 10-year notes by $5 billion and by $4 billion when re-opened the two months following the new issue. In other words, the sizes of the 10-year issuances would increase from $20 billion, $16 billion and $16 billion each quarter to $25 billion, $20 billion and $20 billion, respectively."
What a brilliant solution! In the absence of demand, and abundant supply, issue more supply!
Significantly, the estimated spending requirement for 2009 has, in the estimation of this committee, now ballooned to $2 trillion, and the stipulation is made that a similarly grotesque figure will be required for 2010.
"The net supply of Treasurys in 2009 and 2010 combined seems likely to total more than $3 trillion and could climb as high as $4 trillion. The Congressional Budget Office (CBO) estimates the 2009 Federal budget deficit to be $1.2 trillion. The consensus of private sector analysts is similar to that figure. Yet, neither the CBO estimate nor the private consensus reflect fully the funding needs associated with the Obama Administration's fiscal stimulus plans, the implementation of TARP (or another TARP-like program), or the rumored creation of a bad/aggregator bank to help deal with the underperforming assets weighing down financial institutions. Some of the funding of these government programs will spill over into 2010, a year in which the "core" budget position also will be weak according to mainstream expectations for economic performance."
Importantly, the committee acknowledges for the first time that China will likely be a less reliable sucker for the continued sale of the expanding sea of U.S. debt instruments:
"China, on the other hand, could slow its accumulation of dollar-denominated debt. Such a trend already has begun to develop with respect to its accumulation of overall dollar assets as the flow of private capital into China has cooled alongside the global downturn, alleviating the need to offset capital inflows."
And, in apparent support of the argument for diminishing demand for U.S.Dollar-denominated junk debt, the committee suggests that having a bigger "primary dealer community" would bolster the odds against future auction failures. The solution appears to be to hire more salesmen.
And finally, a larger primary dealer community would help to reduce on the margin the possibility of an undersubscribed auction(s). There currently are just 17 primary dealers, down from 30 a decade ago. Government bond trading desks at the dealers also are not immune from sector-wide capital/balance sheet issues and desks at many dealers are being encouraged to minimize risk.
What an operation! How can this charade be allowed to continue? The only explanation, and its glaringly obvious, is that nobody, from the executive administration level down to Joe the Plumber, is willing to step up and be first to pull the plug and the artificial standard of living we've created for ourselves at the current expense of foreign treasuries and at the future expense of our progeny.
What a sad statement as to the integrity of the human race.
But, whatever. We can't afford to sit around and pity ourselves just because we allowed the thieves of Wall Street and Washington administer this unlubricated broomstick to our collective backsides.
The only intelligent thing to do, and yes I do believe there is a "stuck record" frequency developing here, is to buy gold and silver. This $4 trillion hallucination on the part of the United States financial mis-managers is directly dilutive to the value of any currency issued by that bankrupt nation, and is therefore a natural exponential driver for the gold price.
Gold bullion, gold mining shares, and for maximum upside (with correlated risk) gold juniors. If you choose NOT to participate in gold, you will have no one but yourself to blame for the splinters you'll be plucking out from your derriere that have "In God We Trust" printed on them.
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