Sunday, May 24, 2009

"Loose Lips," Mr. President.

Some things are better left unsaid. It doesn't mean that they aren't true, at least partially, or couldn't be true: it means that categorical statements are privileged information in many cases and often obfuscatory without detailed and complex explanations. Just as often they are prone to misunderstanding and in some circumstances will cause disastrous behavior. There is probably an unwritten rule somewhere that says, the more influential you are, the fewer categorical statements you should make, because a) you're not omniscient and b) the nature of influence is that people are going to misunderstand, sensationalize, and overreact to anything you say about in proportion to the importance of your office.
For example, if you're the CEO of some entity that owes its existence to its credit rating -- say, Bear Stearns or Lehman Brothers, for example -- you probably won't go on national television and tell the world, "we're out of money." Even if the statement were strictly true, prudence would prevent such a farce. Does this really need to be explained to anybody? Given how fast the mere rumors of that condition drove those gigantic firms into dust and erased collective centuries of work and wealth, and then put taxpayers on the hook for the 11-digit losses, no CEO in his right mind would ever expose himself to the accusation of malpractice by being so loose-lipped.
What happens when the most powerful "CEO" of them all, whom "the whole world is watching" -- the president of the United States -- does exactly that?
Well, we're going to find out, because the President of the United States of America announced to the world, “we are out of money.” And in the next breath, as if to prove how disconnected from reality he is, he promised that he's going to continue spending (on socialized healthcare, for example) as if that doesn't matter. He goes on:
"I am absolutely committed to keeping this [national health insurance] process moving . . . "
That is, not only are we out of money, we're going to continue to make sure we're out of money. Just imagine [insert big Wall Street CEO's name here] saying such a thing. Let's consider the implications of such a statement.

When it is merely rumored that a business is having money problems, its lenders demand collateral, add risk premium to their lending rates, and/or disappear altogether. Every tradeable asset remotely associated with that entity is immediately sold and shorted, reducing the book value of the entity in a self-fulfilling downward spiral. When it was rumored, last year, that Bear Stearns was having a cash crunch, it’s lenders did all the above and within days a Wall Street mainstay was acquired in a sham transaction for a nominal sum.

When, shortly thereafter, the same rumors started circulating about Lehman Brothers, the lenders followed the pattern and within days, a Wall Street mainstay was but a memory. Gone. Billions of dollars in assets marked down to pennies on the dollar.

Recall that these events preceded the “world financial crisis” wherein we currently reside.

Enter the Chief Executive of the United States who, after ballooning the national debt to a record amount, turns to the nation’s creditors and says, “we have no money.” Had the Chief Executives of Bear Stearns or Lehman Brothers acted with such indescribable incompetence, they would have been lynched on national TV, rhetorically and legally. What about the Chief Executive of the United States? One can’t use terms like that when referring to him.

As we write this, we note that the US dollar, on world markets, is being heavily sold off, and it’s so obviously a panic sale based upon Obama’s national debt that even the financial press has noticed the connection. But instead of reassuring our creditors, the president tells them, effectively, “your worst fears are correct. The US is broke.”

We wager that the current selloff in the dollar is a “run,” a predatory short sale by speculators reminiscent of the same executed by George Soros on the Bank of England and its British Pound in the early 1990’s. For the president to announce that the US is out of money is to announce that the dollar is overvalued – it is, in other words, to tell the Soros’ of the world, “you’re right to sell.”

Currency speculators used to get ulcers fretting over the tiniest hint by a finance minister or central banker of impending intervention in support of their currency which would decimate the speculator's short position. But Mr. Obama has broken the unwritten rule that a nation's president is to always insist on a strong currency (regardless of the policy followed by the central banker). By admitting that the US couldn't intervene to support its currency even if it were inclined to do so, the community-organizer-in-chief has taken all drama out of the process of staging a run on a currency. The Soros' of the world must be grateful for the assistance. I know I would be.

The US Dollar is legal tender backed, as are all US debt obligations, by “the full faith and credit of the US Government.” Your president has told the world, “there presently is no basis for faith in our debt or our currency.” Your president, demonstrating a community-organizer's understanding of economics, has buried your country in debt and then turned and told the world, “we’re broke.” As debt financing is dependent on confidence, when the Chief Exec is so clearly devoid of the latter, why would anyone engage in the former?

What remains to be seen is just how swiftly the Chinas and Japans of the world will be spooked into dumping US Treasury bonds and driving interest rates through the roof, at exactly the time when they need to be lower. If you thought nobody was borrowing before, image how much nobody will be borrowing when interest rates skyrocket. If the economy was stalled then, just imagine how stalled it will be when nobody lends to the US.

Contemplate this with us for a moment. How will government function, if there’s no money to finance it? Will our lenders, upon whom we are so heavily dependent, demand collateral? The market will drive up rates, that much is inevitable. Will creditors disappear? Will the US follow in the footsteps of Bear Stearns? What will the IMF demand in order to float us an emergency loan? What will the nations, which are currently so hostile to all things American, but especially to "American" financial crises, demand in order to pony up some cash and/or renegotiate our debt?

The next week, and the weeks following, will begin to show the effects of the words that might well be known as “the words that destroyed America.” He may not (or may, how would we know?) be the antichrist, but he’s definitely the anti-Washington, the anti-Hamilton, and the anti-Bush. And he’s manifestly anti-American, Barack Hussein Obama is.

“Oh, pooh-pooh,” you say. “Everyone knows the US has been broke for ages.” No, not so. Everyone likes to cynically remark that it is so, but everyone has also winked at the “deficit spending” that has long been a mainstay of ever more left-leaning policy. Technically speaking, because of the value of the "full faith and credit of the US government," it’s not likely that the nation has ever been truly “bankrupt” -- and never so officially. In any event, no president would ever dare utter such a thing publicly, even in the unlikely event he himself actually believed it. But this is the Presidency of Firsts, and this president is the first to tell the world financial markets, which have just trashed some of world’s largest and oldest financial institutions for insolvency, that the US is, indeed, insolvent. Because, apparenly, he sees the US as insolvent.

The best possible next event would be an orgy of backpedalling on Obama’s unfortunate comments by the administration to the heady music of spin-doctoring by the media. This is the best we can hope for. But not matter how zealous that effort, or how cacophonous a spectacle, the markets have heard the president, who has confirmed their hunch in an unmistakable way. In doing so, he has given them the ammunition they need to bring this already vulnerable nation to its knees, financially, weakening its reputation further, demolishing its bargaining position in the capital markets, and possibly forcing it “out of business.”

The worst possible events would be a panic selloff of the dollar and US treasuries on world markets. That would naturally crash equities markets as well, and what you thought was a “financial meltdown” last year will be merely a bad day compared to what must follow.

The party is truly over for America. Ironic, isn’t it, that America’s party president is the one who killed it?

[edit 2017] In my naiveté, I missed the fact that everyone knew B. Hussein Obama was full of crap.


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