Monday, August 24, 2009

countdown to dollar implosion

Financial Sense | Every few months a chart comes along that needs almost no follow-on paragraphs to make the point of the issue. The chart provided by CIGA Eric covers several important types of US$-based bonds, their inflow and outflow, and the aggregate GrandNet. The financial data is publicly available from the USGovt TIC Reports. The messages are clear. Inflows of foreign funds are dwindling. In the case of USAgency Mortgage Bonds and USCorp Bonds, the nation is witnessing something unprecedented, the net outflow of funds. This is outright rejection. This chart exposes the isolation problem of the USDollar in the bond world, clearly the most important market beneath the currency market. The printing press is the last option.

Ominous is a strong word. Abandonment is better, but disaster is better still. “I find this simple chart so ominous I had to send it. Decelerating year-over-year inflows and outflows across the board. Stick your head in the sand if you like, but string this trend out a little longer and you’re going to have flight from the dollar.” So wrote CIGA Eric. See the article that displays this graph and his few words on the JSMineset weblog (CLICK HERE).

The foreign creditors are moving away from the United States, plain and simple. The big bold red series shows the Grand Net US$-based bond reduction in net flow change from a high around $950 billion in early 2007 to a figure now approaching only $200 billion, thus a severe cut in net inflow. The greater alarm comes from the USCorporate Bonds in the yellow series, whose net flow change is down from a plus $600 billion high at the same time to a slight net outflow negative figure now. The USAgency Mortgage Bonds in chartreuse/mauve/pink have net flow change with peak of plus $300 billion at the same time to a net outflow of a frightening $150 billion now. Since the important peak for mortgage and corporate bonds, the USTreasurys in blue series have recovered from a $200 billion net positive inflow to a $400 billion net inflow. However, one should suspect that the USFed is purchasing the USTreasurys from convenient accounts bearing foreign names, using American funds, and laced with sinister motives founded in deception. Foreigners in all likelihood are not the primary purchasers.

The United States credit markets are losing their legitimate liquidity and increasingly are turning to the desperate reckless alternative, namely the dreaded MONETIZATION. Mortgages in the United States must maintain funding from the USFed and USGovt by direct purchase, no longer a market action. There are mainly sellers. The corporations in the US must maintain funding from a more desperate means. See the Samurai Bonds offered in Japanese Yen denomination, the ones growing in popularity. My view is that a good slice of USGovt Treasury Bonds will be denominated in foreign currency routinely within one year, if the US$ system survives in its current form that long. The conclusion is clear from the messages, both graphic and statistical, that THE US$-BASED BONDS OF ALL TYPES WILL RELY ON DIRECT MONETIZATION VERY SOON OR IMMEDIATELY.