We guess the US dollar will survive this round, too

Foreign Exchange Outlook : Everyone is looking at institutional factors like the Citibank bailout and hardly anyone is looking at macroeconomic indicators, but today we get existing home sales, probably a drop by 3.5% to an annual pace of 5 million. It will be the biggest monthly drop since Sept 2007, according to the Bloomberg survey. In the absence of a plan to stabilize the foreclosure rate and housing prices, the focus is in institutional failure rather than the economic consequences of the data itself. This is US dollar exchange rate negative. But can it be overwhelmed by an Obama spending plan due this week? Yes, but perhaps only temporarily. Spending itself is not enough you need a wide, deep and intelligent plan that everyone can believe in. Already we are seeing “anti-Keynesian” diatribes. Poor Keynes. He is getting blamed for a lot of things he never said or recommended. He did not say "spend your head off, debt doesn’t matter." Of course debt matters.

Without going further down that ideological road, consider the advice from some currency gurus who say “buy currency of creditor countries (like Japan) and sell the currency of debtor countries (like the UK and US).” This is like buying stocks of companies whose book value is greater than their stock prices. But countries don’t have book values. What counts is not the balance sheet, but the ability to generate cash. And here we have to consider not only the government and its ability to tax, but also the ability of private institutions, mostly banks, to generate the cash to pay the monthly bills and survive one more month. In the US, the TED spread (the 3-month Treasury rate vs. interbank LIBOR) is widening out again to 216 bp (according to Bloomberg), from the low in May of 76 bp and the worst-case high of 464 bp on Oct 10. The Fed is making funds available to just about every central bank in the world, including the Swiss and the Mexicans, but who comes first? US banks.

Longer run, the US printing all that money is an evil thing that will come back to haunt us. But in the immediate futures, like this week and next, it’s a powerful argument for the safe-haven status of the US to continue. Institutionally, perhaps the US doesn’t deserve the crown of safe-haven. The US is blundering badly. But in this matter of the crisis, it is still the leader-liquidity comes before solvency. We can worry about credit quality later.

How much money are we talking about? Bloomberg added up all the government programs and arrives at a figure of $7.4 trillion, or about half of US GDP. “Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.” The bailout includes the $700 billion in TARP; $2.4 trillion in commercial paper; $1.4 trillion from the FDIC to guarantee bank-to-bank loans; $29 for the JP Morgan takeover of Bear Stearns; $122.8 billion in addition to TARP allocations for AIG, and now $20 billion directly to Citi plus $306 billion of government guarantees for troubled mortgages and toxic assets.

Bloomberg writes “The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to CBO figures. It could pay off more than half the country’s mortgages.” Moreover, the Fed is responsible for $4.4 trillion of pledges, or 60% of the total commitment of $7.4 trillion-this is what we should be worried about, not the $700 billion in TARP. Bloomberg is miffed because the government won’t disclose the collateral taken, with Bernanke calling it “unproductive” to disclose it.

It goes without saying that this is the biggest bailout ever, dwarfing the Chrysler version, the steel companies, the S&L’s, etc. Is it quibbling to ask whether it’s “investing” or “spending”? Probably not, since the rule of deleveraging together with bad credit quality means downsizing, i.e., permanent losses. We are all going to be made poorer by this, but in the end, what counts is the ability of the US government to sell the paper to get the money it needs to save Citibank and all the others. Can we do it? Yes. Britain is neck-and-neck on aggressive stimulus and other plans. Paulson did a bad job but the job is getting done. We guess the US dollar will survive this round, too.

Bye For Now

Barbara Rockefeller Foreign Exchange Trading
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