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Sunday, November 27, 2011

A derivatives expert on U.S.debt issues

   Satyajit Das is an expert on derivatives. He has had 25 years experience working with companies such as Citicorp Investment Bank and Merril Lynch. He now is a consultant and also gives presentations worldwide. A long article on the U.S. debt crisis is available here. Das writes very clearly and often with some humor and notable quotes.
   Here is a sample:"" China, the major investor in US government bond investors, finds itself in the position that John Maynard Keynes identified: “Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed.""    Here is one more: "" China financed customers creating demand for exports and America received the money to buy cheap Chinese goods. Asked whether America hanged itself with an Asian rope, a Chinese official told a reporter: “No. It drowned itself in Asian liquidity.
   In the last section of his article, Das talks about the devious ways in which the U.S. debt problem is likely to be managed. He suggests that there will be "fudging", "monetization" and "devaluation". As an example of fudging Das notes the manner in which states and cities have tried to engage in what he calls fiscal magic tricks to stave off facing the crisis. Unable to raise taxes for political reasons and facing increasing deficits states borrow money to close budget gaps. As an example he points to Illinois which borrowed 10 billion in 2003. The money was used to invest in its pension funds. But this was not enough and it had to borrow another 3.5 billion and now is planning another 3.5 billion. Illinois had not been making the required annual payments required for its pension funds for years. The unfunded liabilities of U.S. state and local governments is huge. Das puts it at nearly 3.5 trillion dollars. Other ways of fudging the issue include selling off assets to temporarily help reduce the amount of unfunded liabilities.  
   Debt monetization is also a way of dealing with debt. Quantitative easing increases the money supply and eases liquidity problems. In the longer term it debases the currency and may cause inflation according to Das. Monetization is linked to devaluation the final means of dealing with debt. 
   The dollar has been deliberately weakened by government fiscal policy according to Das. In 2007 he notes that the dollar weakened by about 8 per cent. Since 2009 Das maintains the U.S. dollar lost 18 per cent against major currencies including a 25 per cent decline against the Canadia dollar. This decline not only makes U.S. exports more competitive. It also encourages foreign investors to buy more U.S. dollars to lower their average cost. Das notes that the role of the U.S. dollar as a reserve currency allows the country what he calls an extortionate privilege. 
   In conclusion Das thinks that by using fudging, monetization, and  devaluation the U.S. "" will usher in a prolonged period of stagnation for the US economy reducing global economy growth. At worst, continuation of a strategy of FMD(fudging, monetization, devaluation) and maintaining the balance of financial terror will create a volatile and dystopian economic environment.""  For much more see the entire article.

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