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August 28, 2010
Analyst: the US may be the Next Bear Stearns
The US public (read: us and our children) currently owes an outstanding debt of $13.26 trillion, or about 93-percent of annual GDP. Of the total debt, over 60-percent is due within the next tree years. Great news indeed, but could the US be the next Bear Stearns?
Jason Trennert, co-founder of Strategas Research Partners, thinks so.
In an interview with James Freeman and the Opinion Journal, Trennert warned that the federal government has a very short window to correct course, given some very striking similarities with the disgraced Bear Stearns.
"[T]he biggest similarity is the US government seems to be trying to pay for long-term liabilities with short-term funding, which was obviously precisely the biggest problem that a lot of private sector companies had that proved to be a very precarious way of funding yourself," Trennert said.
"When you look at interest rates as they are, one would say, ‘if you're issuing debt why wouldn't you issue debt as long-term as you can? There are a lot of corporations now that are choosing to try to issue 100-year pieces of paper to try to lock in these rates at this level."
So why is the US choosing to do this?
"Our best answer, I would say that there's two. One is very cynical one, which is that you just want the deficit to look as low as possible now so you keep the interest expenses very low," Trennert posited.
Having labeled that the "very cynical" viewpoint, the analyst naturally leads you to believe the other is a not-so-cynical theory.
"The other reason is, I guess, frightening in a way. And that is that the marginal buyers, in particular China, don't want to lend long. They want the leverage that comes with Uncle Sam go back to them every week or two to actually fund the debt. And that's where the deficit could actually be a national security issue to a certain extent, I don't want to be overly conspiratorial about it, but this is certainly ceding some sovereignty when you fund yourself this way."
In stark contrast, using the UK as just one point of reference, Strategas data shows virtually the exact opposite situation -- over 45-percent of UK sovereign debt is long-term. Trennert attributes the disparity to the bad habits the US has afforded itself due to the dollar's standing as a reserve currency. He likened it to a supermodel who fools herself into believing she can eat whatever she wants without every getting fat, but one day wakes up to be 500-lbs.
Morgan Stanley has also warned about the imminent danger. In its most recent research report, they reinforce what has quickly become a prevailing notion amongst economic circles - that it may no longer be question of if governments will default, but a matter of when and which promises they renege on.
All of this goes back to the much larger issue of what money actually is -- money and dollars are simply IOU's. Because the gold-standard was ended in 1971, the money that is issued by governments today are now intrinsically useless -- it is simply money by edict, or fiat. As confidence in the US government and its dollars fades, the willingness of others to accept the dollar fades, while other nations with more reputable reputations capitalize and grow. And as such, due to America's profligate spending and utterly inept fiscal policies, it devastates investors and the country's economy. Bear Stearns and the subprime mortgage crisis reflect the consequences - just on a much smaller level.
In fact, a number of the world's largest banks, including Citigroup, JPMorgan and HSBC have launched international roadshows promoting the use of the renminbi for trade.
James Freeman continued, "I think what you're saying now is that the Treasury has a window where if they're responsible it'll shift a lot more of this debt to the long term. Is there a sign that they're doing that?"
As transparency goes in the Obama White House, Trennert claims the Treasury has stopped publishing the data for some "inexplicable reason," while Treasury Secretary Geitner has talked about extending the debt's maturity date.
Even so he reminded, "The problem though of course is that the magnitude of the debt is so large, that you've only just begun."
Leftists can spew all the venomous rage they want toward corporations, the fact of the matter is, they didn't understand what led to the housing boom and bust then, and certainly don't understand what their big government policies lead to now. Bear Stearns and the subprime mortgage crisis may look like a hiccup compared to the troubles of the Treasury.