Thursday, June 18, 2015


Just sitting around for Greece to disappear thinking that would really be a tragedy for the clogging profession...or that Janet would pop up with a "just kidding" and raise rates 50 b.p....or that Little Paulie Krugman would make sense for once...never happened.  Then came the news that the Congress in what to most sane people would appear to be a complete reversal, gave Il Duce his "fast track" trade authority and sent the bill on to the Senate...but of course this being Washington, nothing is sane.

Anyway, Asia came to mind and I started thinking about the China gambit in the formation of what amounts to an Asian World Bank and where this fits into the equation.  Everybody seems to think it's a good idea even if the Chinese control the thing.  China of course promises to be fair in its administration but fair to the Chinese---like most other things--can have a variety of definitions and applications; there is a lot of money to be spent as a result of this beast and you can be sure that a "fair" amount of it will wind up with Chinese interests and oligarchs not too terribly far removed from either the political leadership or the People's Army.  The U.S. will not participate nor will Japan.  We asked a number of our friends--actually, everyone for whom we had a phone number--and were politely told to bugger off by all including the Brits, the Aussies, the Germans, the French and the Koreans.  Another triumph of American diplomacy.

While I was thinking about this, one of those TV ads came on that warns you about the danger of inflation and the national debt and how to protect yourself from the same.  Actually, I learned something:  the national debt is now over $18 trillion!  I mean, who knew, who was keeping count?  Now that's a hell of big number I said to myself, I wonder if Little Paulie knew about that because he's always telling us that we shouldn't worry; everybody wants to give us money as witnessed by the very low interest rates at which we have been able to borrow.  Sounds good, but then I started thinking about what would happen if Janet started to tip over the punch bowl, would the bucks be still available?  Well, probably I thought, but of course at higher rates and everyone knows that there is an insatiable demand for this kind of quality investment and the only place to get it is..........uh oh.

I started thinking about the Asia Bank again.  When this thing gets going, there are going to be a hell of a lot more Renminbis floating around out there...a lot more.  And with that will come the need for far greater convertibility than there is today, because to get from the Renminbi to the reserve currency, the doll.......uh oh.

Why does there have to be only one reserve currency?  Well, because you need something with full convertibility, open markets, statistical certainty, trading platforms and depth.  So?  If the Chinese want to make that possible, what's to prevent them from so doing?  And who is going to stand in their way?  Surely not the guardian of all currency issues, the IMF.  Heck, they are already pushing for it.  Our close allies?  Hang on, I'll call the State Dept to find out who is on that list this week.  Those who don't like the U.S. a lot?  Now there's a growing list!  There is no magic to a reserve currency; faith and belief is all that is needed and a reserve currency is a great vehicle for investment.  And if there is a lot of it looking for a home...

Anyway, I had nothing better to do than think about things like this today and wondering what it would be like if global investors suddenly (well, it wont be sudden) were faced with alternative instruments to U.S. Treasuries?  Understand, this would certainly be "on the margin" as the smart guys like to say because there's no chance on an $18 trillion market springing up over night.  But it is on the margin where things get priced.  Rest assured, that the first Renminbi issue for international distribution be it from China, the Bank or where ever will be Triple AAA.  Is the coupon through Treasuries or above?  Keep in mind, one issuer HAS to issue, the other doesn't.  With $19 trillion to worry about one doesn't need competition for the product...or maybe one does.   I need a nap before dealing with that one.  Maybe I'll ask Little Paulie.

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