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“My job is to make sure we can borrow to finance.”

-Timothy Geithner, July 25, 2010

That’s what US Treasury Secretary Timmy Geithner told Meet The Press host David Gregory yesterday. Timmy has already told us that he “isn’t an economist.” He’s not a mathematician or risk manager either. He’s simply a professional politician who is doing his job.

In another article by Bloomberg’s Daniel Kruger this morning titled “Deficits Don’t Matter as Geithner Growth Gets Lowest Yield”, Timmy expanded upon his aforementioned job description explaining that “if you look at financial markets, say, look at how much the Treasury is paying to borrow today, there is a lot of confidence, not just of Americans but investors around the world, that we’re going to find the political way to do it… there’s no alternative for us.”

There may not be an alternative to marking-US-interest-rates-to-model, yet… but the days of seeing American politicians borrow from their citizenry’s long term future in order to finance their short term political agendas are numbered. Borrowing short to lever yourself up long of debt doesn’t work.

Geithner must not realize that his financial outlook and fiscal policies contradict one another. If US economic growth were to, as he said yesterday, “gradually strengthen for the next year or so”, what in God’s good name are US bond yields doing at all time lows?

This is already getting priced into political polling expectations, but Timmy and the Administration of Groupthink Inc. will meet their maker come the fall (unless they change the reporting date, Q3 US GDP is going to be reported 4 days before the mid-term elections and we think that US GDP growth will slow sequentially). I think global risk managers already get that, but do they get how this game of US currency and interest rate manipulation ends?

Without reviewing his entire book this morning, one way to start answering the question of how this gigantic game of over-leveraged countries playing a Fiat Fool version of Monopoly ends is reading Richard Duncan’s, “The Dollar Crisis.”

Originally published out of Asia in 2003, Duncan’s International Bestseller has recently been revised and updated, but it gets a real-time update that is marked-to-market by the US Dollar, deficit, and debt balances every day. The upshot of Duncan’s answer is that this game will not end well.

Lets score these 3 D’s (Dollar, Deficit, and Debt) as of this morning’s levels:

  1. DOLLAR: US Dollar Index was down for the 7th consecutive week last week, closing out the week at $82.46, down -7% since June.
  2. DEFICIT: In their mid-year review, the OMB revised its 2011 budget deficit HIGHER on Friday to $1.42 TRILLION (versus $1.27 TRILLION prior).
  3. DEBT: US Debt Clock.org (which now shows US State Debt/GDP ratios) continues to tick higher by the second ($13,240,034,568,703 and counting).

By any long term historical measure, this global experiment of having a Washington Squirrel Hunter make sure he can “borrow to finance” a Fiat Republic is new – so just keep that in mind when you consider the great US financial empire of treasury debt “safe”…

This, of course, is not safe (if you want the real-time wakeup call on this, pull up that www.usdebtclock.org site while you read this note – it’s very distracting - and it should be). Ever since Nixon undermined Bretton Woods and abandoned the gold standard in 1971, the US government has given itself the global entitlement to print moneys in order to finance unfunded liabilities.

Before 1971, as Duncan succinctly explains, “the crucial difference between the reserve assets then and now is that gold could not be created by a government or by any other entity to finance a balance of payments deficit.”

On Friday, we’ll get the BEA’s overstated estimate of Q2 US GDP. As a reminder, our Q3 Macro Theme of American Austerity continues to forecast that A) the denominator (US GDP) will slow in Q3 and B) the numerators for both the 2011 deficit and debt to GDP ratios will continue to worsen as a result.

My immediate term support and resistance levels for the SP500 are now 1085 and 1112, respectively.

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

Borrow To Finance - debt