My Red Ink is Better Than Yours

The one paid subscription that we highly recommend is The Privateer, whose author William Buckler, is based out of Australia. He provides a succinct bi-montly insight into the U.S. and global markets. We find the reports well written, well-balanced and deeply insightful. Please note that we do not receive any compensation for recommending The Privateer. Here is an small extract from William Buckler's most recent commentary.

“Stein’s Law”:

This law is named for Mr Herbert Stein, the Chairman of the Council of Economic Advisors in the first half of the 1970s under Presidents Nixon and Ford. The law is simplicity itself and very useful when contemplating “unsustainable trends”. It goes like this: “If something cannot go on forever - it will stop”. So it will. The great global problem today is the manner in which “it” DOES stop.

My Red Ink Is Better Than Yours:

If you read the financial press, especially the US financial press, you will learn that Europe is about to implode under the fiscal strains now being placed upon Greece and other “peripheral” nations like Italy, Spain and Portugal. Looking further, you will find that Japan has passed the fiscal point of no return with huge deficits and sovereign debt which is double annual GDP and rising. China, meanwhile, is an economy trapped inside a bubble of its own making and is just waiting to quite literally “pop”.

If you paid attention to the potentates gathered at the World Economic Forum in Davos, Switzerland, you would have heard that the recent falls of the Euro against the US Dollar are due to the fact that “sovereign debt risk will continue to be a key theme”. Whose “sovereign debt risk”? Why everybody’s - except the US itself. How can there be any sovereign debt risk in the US with the government in the process of adding $US 1.9 TRILLION to its Treasury’s credit card limit?

In two hits about seven weeks apart, the US government has given itself permission to borrow and spend almost $US 2.2 TRILLION to tide themselves over the year of 2010. Any other nation which had done this would have seen their interest rates blow out and their currency plummet. Any other nation would have the IMF flying in from all directions while responsible central bankers and “money managers” everywhere fled all forms of paper investment denominated in the currency of the nation which did such a thing. But then again, the US is the only nation whose government still maintains the fiction that there is a “limit” on the amount they can “legally” borrow. They call it a debt “limit” or “ceiling” and it has grown almost continually from $US 50 to $14,294 Billion over the past seventy years.

Just over 97 percent of that debt accumulation has come since the US Dollar became a paper currency backed by nothing but debt in 1971. Nearly half of it has come since the “limit” was raised to $US 7,384 Billion in May 2003. Clearly (with apologies to George Orwell) - “all debt is equal, but some debt is more equal than others.” The debt which has been the most “equal” of all ever since the end of WWII is that which is issued by the US Treasury. Why? Because it is issued in US Dollars, the world’s reserve currency since Bretton Woods.

Flying To Safety For Three Generations:

For well over 60 years (and that is three generations in anybody’s language), there have been two ultimate safe havens in the eyes of almost everyone involved in global finance. One of these was the US Dollar itself, the cash US Dollar. Unique amongst all world currencies, there are almost certainly more cash US Dollars in circulation or in private possession OUTSIDE the country of origin than there are inside it.

Cash US Dollars are the “safe haven” of choice in two areas. One is in the area beyond the law of the land where the cash ends up. The other is in the area of the very small holding. For decades, the ultimate form of “savings” in much of the “undeveloped” world has been a $US 10 (or 20 or 50 or even 100) bill hidden under a rock in the back yard. And the more impoverished and politically degraded the nation, the more coveted these cash US Dollars have been.

The other “safe haven”, and the one most often meant when the term “safe haven” appears in the world’s financial press, is US Treasury debt or other forms of debt denominated in US Dollars. This is the form of financial paper which has been the destination of every “flight to quality” which has roiled global finance since the end of WWII. Very few people alive today remember a world where this didn’t happen.

And for that precise reason, very few people in the world today can imagine a world where it DOESN’T happen. That is the only reason left why President Obama can blithely talk about the need to stop treating the US Dollar like “Monopoly money” one day - while signing into law permission for the Treasury to borrow another $US 2 TRILLION the next. The US is obsessively clinging to the belief that “it can’t happen here”. But Stein’s law is inexorable and it applies to everyone, even the USA.