Last week, the greenback was beat up especially hard after the Federal Reserve engaged in two US Treasury buybacks that showed a massive jump in interest to sell. This coincided with the warning from Moody's on the UK losing their AAA rating and Pimco's Bill Gross saying the US may be next.
The Fed's Treasury purchase program was the canary in the coal mine for the US dollar. On Wednesday, the Fed bought $7.7 billion of Treasuries out of $37.2 billion tendered. On Thursday, the Fed bought $7.4 billion out of $45.7 billion tendered, a jump of 22.8% in one day. After many foreign governments have expressed concern over US fiscal management, the thinking is that these countries may be taking advantage of the Fed program to dump their holding of US Treasuries.
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In turn, they would then dump their US dollar holdings as well. It's interesting that US government officials have been getting grilled on the Fed's program to buy US Treasuries on their oversea trips.
This is perhaps why US Treasury Secretary Geithner attempted to calm fears last week when he said that the US must have an exit strategy for fiscal spending. "It's very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term."
The President of the Dallas Federal Reserve Richard Fisher shares similar concerns of foreign holders of US Treasury Securities. In a WSJ interview, "Mr. Fisher defends the Fed's actions that were designed to "stabilize the financial system as it literally fell apart and prevent the economy from imploding....Yet he admits that there is unfinished work.
Policy makers have to be "always mindful that whatever you put in, you are going to have to take out at some point. And also be mindful that there are these perceptions [about the possibility of monetizing the debt], which is why I have been sensitive about the issue of purchasing Treasuries."
The issue of the radical fiscal experiment that is now underway in the United States is dominating stock, bond, and currency markets. During World War II, the US debt had exceeded the size of GDP and had to be reduced by draconian methods. The US is embarking upon a debt issuance program which is on track to take the debt total back above the size of GDP.
In an upcoming article for SFO magazine, I interviewed Dr. Gene Smiley who authored the book, "Rethinking the Great Depression." I was looking for some perspective on the 1930s/1940s and today. I got it. When I asked him about the fiscal condition of the United States and the size of the US debt, he said, "It is unconscionable and absolutely irresponsible."
I concur and apparently so do the markets.