Post-QE2 Blues: Time for a Debt Rehab? (Guest Post)

By Andrew Butter

Nouriel Roubini’s big idea was [IF] you spend more than you earn, [THEN] you have to borrow so you can pay your bills; but in those circumstances, [IF] you run out of credit, [THEN] you can’t pay your bills. That may not sound like rocket science, but sadly it’s not something you learn in Econ-101, economists need a PhD before they can work that one out and many can’t, even then, which is why they had the credit crunch.

Of course if you own your own fiat currency, that’s not a problem, when you run out of money, well, you just print some more, easy. The problem however is when “aliens” get in the picture. So when America pays out more money for importing oil and auto parts made in Japan, than she earns selling fixer-upper suburban houses in Detroit (to aliens), she needs to find some aliens to give her credit, for example, by buying U.S. Treasuries and other “U.S. government securities,” and so on.

In 2003 Nouriel Roubini noticed that the U.S. current account deficit was ballooning; that’s the difference between what America sells to aliens compared to what she buys. He pointed out that sales of U.S. 

Treasuries and so on (to aliens) were starting to be not sufficient to finance that; and thus unless “something was done,” well, there would be Armageddon. That’s when he got his nickname “Dr Doom.”

Luckily, “something” was done. Legions of “God’s Workers” all labored feverishly to originate and distribute toxic assets, which they then sold to unsuspecting foreigners as in Norwegian pension funds and self-important morons from RBS, who now have court orders stipulating we are not allowed to mention them by name, so as to protect their “rights” to peacefully spend the perks they got presiding over that Charlie Foxtrot.

So a crisis was averted, between 2004 and 2007 God’s Workers cleverly managed to get dumb foreigners to hand over $2.5 trillion in return for what turned out to be a load of junk, which was a stroke of genius. My vote is that the God’s Workers should all be awarded the Congressional Medal of Honor and they should keep their “hard-earned” bonuses, because they saved America (for a while).

And that’s when the talk of “A stopped clock is right, twice a day”, started. As in Roubini’s dire predictions were proved to have been totally wrong (for a while). Then the darned aliens stopped buying the junk and then there was a “credit crisis,” as in no one could do the old “Rolling Loan Gathers No Loss” trick, anymore.

And here we are, post-crunch, but although these days America’s current-account deficit is averaging $100 billion a quarter, which is half what it was is the heady days when it averaged $200 billion a quarter. $100 billion a quarter is still a lot of money, even these days, for example, that’s even more than it costs to run a decent sized war.

The difference is that when it was $200 billion a quarter you could sell a AAA toxic asset with “Made in America With Pride” stamped on it’s rump, to just about anyone (imagine in Q2 2007 they sold over $300 billion of that stuff to the aliens).

Those were the days!

Sadly, all good things must end. Recently released numbers from the BEA show that in QI 2011, the aliens sold back (presumably at a steep loss) $7 billion more toxic assets than they bought; (that’s on Line 66 of International Transactions, by the way).

Sales of U.S. government securities (to alien governments as well as ordinary aliens — lines 57 & 65) was down too, $74 billion in Q1 2011 compared to $185 billion in Q3 2010.

Perhaps that was an unintended consequence of QE2 where the Federal Reserve was supporting the price of U.S. Treasuries in USA, by buying them, and that might have discouraged the aliens? Or perhaps that was intended, certainly there has to come a point at some stage where America needs to make a real effort to sell more “things” to aliens than it buys from them?

Perhaps that Bernake chap is not half as dumb as he looks?

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