Sunday, February 1, 2009

The Debts of the Lenders: The Davos Agenda - Global Quantitative Easing

In other words - convincing the emerging market lender nations to continue buying the debt of the West. So, there you have it.

All those fancy canapes, martinis, and presentations are nothing more than a giant dressed up sales pitch to continue buying the equivalent of timeshares in America, the UK, and the EU. Calls for "international cooperation" are really disguised pleas for more bond purchases.

Western nations continue to pontificate about how essential (their) consumers are to the world economy. But w/interest rates already at record lows, Western central bankers have resorted to unorthordox measures like buying their own bonds as evidenced by Bernanke's numerous alphabet programs to buy commercial paper (the UK has also announced a similar program). However, nothing is free.

The bond markets WILL reflect this added burden on borrower nations' balance sheets in the form of higher interest rates sooner or later. This is the last thing Bernanke, Alistair Darling, or other Western central bankers want. After all, there is a limit to how much debt nations can issue before supply overcomes demand.

And these measures do not even include the added cost of any "bad bank" bailout.

In order to maintain low interest rates the West MUST convince the Middle Eastern oil producers and the East Asian factory nations to stand behind their bond purchases. Otherwise the facade will collapse and these central bankers will be exposed as the only buyers in the room. The bond markets already saw some of this last Thursday after China signaled its displeasure at US comments regarding "currency manipulation."

However, the West faces a sceptical and jaded audience. Emerging market sovereign wealth funds have already been badly burned by prior investments. CIC (China Investment Corporation) and Temasek Holdings (Singapore) are estimated to have lost 50-60% of their investments in Morgan Stanley and private equity houses. Exact figures are hard to come by since the government arms have not been forthcoming w/their true losses. Instead the losses are estimated from current market prices compared to the purchase price and general market conditions.

While the sovereign wealth funds have publicly commented that their investments are "long term" stakes, there are already clear rumblings of discontent as evidenced by China's Premier Wen Jiabao's comments last Thursday that sent the 30 year long bond soaring to 3.6%.

Indeed, the problem extends further than many realize. Sovereign wealth funds are the public face of foreign investment. Emerging market nations face immense public pressure to focus investment INWARDS on domestic infrastructure projects. Their central banks face pressure to initiate their OWN quantitative easing programs (e.g. buying their own bonds).

Why should they lend more money to spendthrift Western gamblers who have already blown several trillion $ worth of taxpayer revenues?

Only time will tell what measures ultimately come out of Davos. Indeed, the Davos meeting is a stepping stone or bridge of sorts to the next major international conference: the G20 meeting in April where President Obama will be attending.

He can't afford to miss it. Literally.


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