The Inevitable Headline

 The coming headline:

XXXXXXX defaults on debt.  To leave EU and reissue Currency. 

Greece? Spain? Or perhaps Portugal goes first.  The seismic shifts from this first domino will be huge.  The Greek "bailout" was anything but that. A mere band-aid on an open wound. The debt problems still exist, and the austerity measures that are causing riots will surely deepen the recession. Or maybe the people will fight back enough to cause the government to lift the measures. Either way its bad for the world economy.

You know the evil empire guys at Goldman Sachs have worked out the fair market value for all the EU member country’s currencies if they go back to them.  They will not tell anyone, as they want to trade on this information.  The United States Treasury and Federal Reserve have target currency conversion rates too.  But theirs are surely inferior to those of Goldman’s.  So in the confusion and chaos that will follow such an announcement what is likely to happen?  Well – surely such confusion is good for the dollar.  Good for Treasuries. 

Is it possible for Treasury yields to go negative, again?  It has happened already right.  Is it possible the United States of America could start charging for the right to buy a US Treasury?  Why not.  If you want to buy a US Treasury you must pay 1%.  And this might not be a short term phenomenon, but one lasting months, quarters or even years.  Negative interest rates on US Treasuries for extended periods.  Why not?

Now if you can wrap your head around that concept, that buyers will have to pay for the privilege of buying US Treasuries, then try this one.  What happens when all currencies are no longer benched to the dollar.  What happens when US Treasuries are not viewed as the safe haven.  What happens if the sentiment turns so abruptly that instead of paying the US to issue them a T Bill, they avoid us like the plague.  I don’t know….Where in the world will all those dollars go then?

-Michael (from Feb 6th)