[DEBATE] : UK Telegraph - Does U.S. face a run on its currency?

[Riaz K Tayob]

Ambrose Evans-Pritchard: Does U.S. face a run on its currency?
    
Submitted by cpowell on 08:55PM ET Tuesday, September 23, 2008. Section: 
Daily Dispatches

By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, September 23, 2008

http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2008/09/23/fin...

This just arrived in my e-mail from Alex Patelis, global strategist at 
Merrill Lynch.

* * *

AS THE US PRINTING PRESS STARTS

Taking Stock

* Treasury buying mortgage-related assets: $700 billion.

* Potential supplementary stimulus package favoured by Democrats: $100 
billion.

* Insuring money market funds: $50 billion.

* Treasury fortifying the Fed's balance sheet: $100 billion.

* Expansion of temporary swap lines with central banks: $180 billion.

* Loan to AIG: $85 billion.

* Fed purchase of agency discount notes abd ABCP: amount not specified.

* Fed loans through the Primary Dealer Credit Facility: $20 billion 
through Sept. 17.

* Fed's discount window: $33 billion balance.

* Treasury purchase of GSE MBS this month: $10 billion.

* Potential cost of Fannie/Freddie bailout: $200-$300 billion.

* Financing the current account deficit: priceless.

Investment implications: Sell the U.S. dollar.

"The fiscal cost to the United States is likely to be enormous. 
Speculation will intensify on a possible US government paper downgrade. 
US policy-making and credibility have been put into question. The safety 
of US assets has been put into question. We remain concerned with the 
repercussions that this crisis will have on the financial flows into the 
United States against the context of a still large current account deficit."

* * *

Ouch!

Mr. Patelis has come within a whisker of warning that the US now faces a 
full-scale run on its currency and debt markets. There is certainly a 
risk that this could happen.

By my tally, the serial bailouts add $1.6 trillion to total US debt, or 
12 percent of GDP (at least on paper). This is worse than the Swedish 
banking collapse in the early 1990s.

An entire generation of American policy-makers -- Clinton, Bush, Rubin, 
Greenspan, and the congressional leadership of both parties -- has come 
perilously close to ruining a great nation. The creation of the credit 
bubble was one of the most disgraceful episodes of economic government 
in western history.

Nothing can justify it. There is no parallel to the Spain of Phillip II, 
who ruined his empire to pursue the religious cause of 
counter-Reformation, or to the bankruptcy of the British Empire 
combating fascism. It occurred because America abandoned all restraint 
and gave licence to consumer hedonism.

Having said that, I still believe that the US has the cultural vitality 
to pull itself out of this debacle.

While I endorse Mr. Patelis' indictment, I do not entirely share his 
conclusions. The debt added is backed by collateral, mostly housing, and 
is therefore nothing like normal government debt.

Even if it were, the US general government debt (owed to the public, 
under IMF measures) would rise from 48 percent to 60 percent of GDP. 
Yes, I know the US "national debt" is higher, but that is not the 
relevant benchmark for worldwide comparisons.

This extra debt is a tax on the future. It is unconscionable, but it is 
not a catastrophe. It would still leave US debt at French or German 
levels, and well below those of Japan and Italy -- assuming that you 
believe the official figures.

I do not think it will come to this. The RTC made a profit in the early 
1990s as the savings-and-loan crisis slowly abated. Paulson's "TARP" may 
do likewise. The ABX index used to price subprime debt almost certainly 
overstates the likely default rate.

Stephen Jen, currency chief at Morgan Stanley, says bank crises are 
bloody for currencies, but nationalizations of the banking system (which 
is what we have here, in disguised form) typically mark the bottom.

I do not share the widespread view that the dollar will collapse. This 
has prompted a volley of hostile comment, as if I was somehow turning 
traitor to the cause of bears, or had become an optimist overnight.

The reason why it will not collapse -- at least for now -- is that the 
euro is facing an even deeper and more intractable crisis, Britain is 
mangled, Sweden frozen, most of Eastern Europe is facing a swing from 
property boom to bust, Brazil is about to slow dramatically, Japan is in 
full recession, and China's banking system is buckling, as Fitch warned 
today.

What I envisage as this credit crisis goes turns into a full-fledged 
global economic slump is that half the world resorts to currency 
devaluation in a beggar-thy-neighbour scramble to stave off recession 
and cling to market share.

This will be very good for gold, though only once the EMU smash-up 
becomes more evident, perhaps with the onset of street protests in 
Spain. You won't have to wait very long.

To those GATA loyalists asking me why I never report on their claim that 
the gold price is manipulated by central banks, I can say only that it 
would be a full-time job to attempt to verify such assertions. I cannot 
judge whether China, Japan, Russia, emerging Asia, or the Mideast 
petro-powers are colluding in such practices, or ascertain why they 
would do so. And unless they collude, any unilateral efforts by the US 
to suppress gold would prove futile -- would it not?