Sic Transit Gloria Wall Street

One slip, and down the hole we fall
It seems to take no time at all
A momentary lapse of reason
That binds a life for life
A small regret, you won’t forget,
There’ll be no sleep in here tonight

-Pink Floyd

The US Government is pulling out all the stops to try and stop the hemorrhaging of cash that is occurring across the globe.   The problem is not contained, and every trick the Fed pulls to try and get around an obstacle is only leading to yet another obstacle.

I’m no expert when it comes to matters of high finance, but from what I’ve been reading, the main action is going to be in credit markets and the whole derivatives mess that is yet to come.    The markets will continue to move up & down violently… it’s the nature of things these days.   The world of paper currencies and debt markets is based on confidence and trust… and usually little else.  When no-one trusts anyone else to repay debts, the credit market freezes up, which is exactly what we have been seeing over the last week or more.  Who knows when it will end?

Some data points for everyone to follow:

• We’ve promised to bail out everyone and their brother.  Depending on who’s math you choose to follow, this will cost the US taxpayer somewhere between a ton of cash and a whole shitload.   We will finance these bailouts by issuing more Treasury bonds.     The problems I am reading about these days are that long-term Treasuries (i.e. the 10 & 30-year bonds) are not attracting a lot of interest from potential buyers.   That is because the current coupon (i.e. interest rate) isn’t high enough to get people to invest in our debt.  If we can’t sell Treasuries, we will not be able to finance the daily workings of the government.   If we jack up the interest rate on Treasuries, that means very bad news for the housing market, among other things, as interest rates for mortgages will climb.
• The government if Iceland has come out and stated they are close to bankruptcy.  This will not be the last government that will have to approach the confessional in this way.
• The financial mess that has swept through Europe may mean the death of the Euro.   Again, this is not the first fiat currency to go into a potential death spiral, and it may not be the last.   Paper money has value because people think it does… the minute they stop thinking that, any ‘value’ it may hold disappears in a puff of logic.

There’s plenty of other stuff, but I’m at work right now and aim to keep that job.  The main point is this: the financial storm that’s sweeping across the globe is just the beginning.  We still have trillions of dollars in credit default swaps and other derivatives out there, and the US government is going to be faced with the decision to either raise treasury bond interest rates or save the housing market.

On a plus side, the price of oil has fallen off a cliff.    It will be interesting to see how far down it goes, though OPEC is already stating their lack of amusement with recent market events.    Locally, some gas stations are selling regular unleaded for under $3 per gallon again.   Enjoy what silver linings you can in the current economic dislocation.

We have lived off of credit for a long time, and the bill is now coming due.  The process of paying that debt down is going to be painful for most of us sooner or later.   For what it’s worth, both presidential candidates are promising either tax cuts or no new taxes for all except the wealthy.  I personally think they’re lying.  We have been able to finance our expansion of government through raising the debt ceiling and selling Treasury Bonds like nobody’s business.   We appear to be reaching the end of the line for the ‘buy now, pay later’ method of financing government.   I fail to see how we will repay these debts short of  (much) higher taxation, hyperinflation of the currency or outright debt repudiation… all of which are dangerous.

Should be an interesting 4 weeks until the elections… keep your eyes open.