2008 sucked. Will 2009 bet better?
"Man, besides the Beijing Olympic Games and the outcome of the Presidential election, 2008 was such a messy, despicable year. Actually, it made me wish it was 2007 again." A good friend of mine came up with this slightly tongue-in-cheek comment last week. It came somewhat out of the blue during a rainy lunch break we were sharing together, and I welcomed his observation with a chuckle. Still, I don't think any American middle class person would disagree with that statement, because let's be real, 2008 did suck for our wallets and our spirits.
Nonetheless, I personally hate lingering in the past for too long. However dark the situation may be in the USA, for the most part we still have it better than the Greeks nowadays, or than the French three years ago. Most people expect 2009 to be bleak, and it will probably be at least during the first half. Yet I am actually quite excited about the New Year coming along and I wonder what it's holding, good or bad. Let's take a look at French intellectual Jacques Attali's global perspective from the other side of the Atlantic.
Here's Jacques Attali's take on 2009
"2009 holds only two guaranteed milestones: it will be the international year of Astronomy, as well as the time for the 21st century's longest solar eclipse. That's all for the next 12 months' certainties, for the rest of the 2009 panorama is more than blurry. Imagining what our fate for 2009 will be like revolves around five essential challenges. From important to extremely important, here are these issues:
- Who will win the June 2009 European elections?
- Which party will take over during the September elections in Germany?
- How will the oil exporting nations handle the tanking prices of their commodity of choice?
- What are the next bad global financial news?
- How will terrorism manifest itself from now on?
Considering all these questions, two main scenarios seem possible.
Here is the most probable scenario. In USA, the new president successfully starts financing much needed nationwide infrastructure and public property upgrades, and does it by borrowing Chinese and oil funds capital. In Europe, a chaotic campaign accompanies the aforementioned 2009 federal elections and shows the rest of the world the inner discord plaguing its leadership. As a result, foreign investments in Europe stagnate and start fueling a recession. Emerging nations like China, India, Ukraine, Pakistan and northern Africa are facing even tougher political challenges due to local instability and civil unrest, causing investors, entrepreneurs and local elites to flee.
Now here is how a less probable scenario could unfold. People managing the world's largest sovereign funds (such as oil producing nations) might come to the conclusion that America's huge debt cannot and won't ever be honored, that the state's deficit merely is too large, that the Fed's monetary policy is a failure, and that Washington simply lost control of the ship. This would mean lending cash in exchange for American Treasury Securities (*) is too risky an investment. Any reluctance from foreign lenders to buy Treasuries would translate in higher interest rates on America's debt [i.e. our nations sinking deeper in debt] and further depreciation of the dollar. America's virtual bankruptcy would affect the whole world by spawning a general hyperinflation.
De facto, the likeliness of each scenario to actually occur can be evaluated by watching closely whether or not the international marketplace considers the US Federal State a trustworthy borrower. Short term interest rates on Treasury bills (T-bills) can provide that information (**). Likewise, observing how long-term securities like Treasury notes and bonds (T-notes and T-bonds) are traded can give an insight of the level of lasting confidence lenders have. The higher selling options on these long-term products are, the more likely scenario number two becomes (***).
Nowadays, the way Treasury securities are valued is extremely relevant. Investors simply do not trust short-term Public Debt bonds anymore. On the other hand, longer term selling options on these securities are soaring (****). This means America's inevitable future bankruptcy has become a safe investment bet for those able to take a short position. Ultimately, markets losing faith in America means losing faith in the Market Economy itself. This is a paradox that might soon become a reality." J. Attali.
Jacques Attali is a French economist, writer, scholar and former Secretary of State under late French President Francois Mitterrand. Translated from French by the MiddleClassCrunch.com Team from L'annee T (post) by Jacques Attali.
(*) American Treasury Securities are government bonds issued by the US Department of the Treasury through the Bureau of the Public Debt. The Federal Government pockets cash and finances its debts by creating and selling these financial instruments. Treasury Securities are commonly knows as "Treasuries". Domestic and foreign banks, financial institutions, pensions or investment funds (a.k.a. institutional investors) are the largest purchasers of these instruments. Individual investors (the American public) also have access to these securities. Investors in those instruments become lenders to the American Federal government, and the Treasury Security is the contract specifying the lending agreement at a certain interest rate. Therefore, investors get a dividend payment either when the Treasury Security matures (end of a short-term contract) or regularly over the lifespan of the security (usually for long-term contracts).
(**) The Treasury offers four types of marketable securities: Treasury bills (T-bills), Treasury notes (T-notes), Treasury bonds (T-bonds), and Treasury Inflation Protected Securities (TIPS). These instruments are usually highly liquid and traded on the secondary market. There are also non-marketable securities issued to subscribers only.
(***) An option is a contract to buy or sell a security on or before a certain date in the future for a predetermined price. When one wants to buy (i.e. go "long") it is a "call" option. When one wants to sell (i.e. go "short") it is a "put" option. The end of Mr. Attali's article deals with the strong sign of discomfort that high demand on long term Treasuries "puts" create when investors reflect on the American Federal debt.
(****) This actually means investors are shorting the long-term American debt! Justified or not, this is a pretty terrifying outlook, because it means institutional investors (which are considered savvier...) do not believe Treasury bonds will be honored when reaching maturity.
