This started life as a comment on billmon's recent post "Things Become More Serious",but it got out of hand, so I'm turning it into a diary. By the way, for all you DKos Русская мафия assholes who think no one but you gets to have an opinion on Russia, note that I haven't mentioned Russia at all. Although I could have.
Well, let's see:
- Mutual funds were never supposed to be a parallel deposit system. They are investments, albeit highly liquid investments. The real problem was the conversion of illiquid assets into a parallel deposit system, namely homes via HELOCs. The other real problem was the creation of a pseudo-insurance system for investments, namely the credit default swaps, which are built like insurance but traded like securities so that they're potentially a greater problem than the risks they're covering.
- The price tag is not US$700 billion. That's the maximum amount the program can carry at any given time. In other words, that's the balance sheet. The cost is far more. I guarantee it.
- Re both stocks and Treasuries falling: His next two points indicate a far worse source for this phenomenon than stagflation. The world is afraid that US government credit is tanking, and it doesn't want to be caught holding anything that looks like a Yankee Dollar. While the American public is only now waking up to the fact that it's being paid in funny money, the rest of the world has already figured it out and isn't going there any more.
- He's right that the US won't be defaulted. The question is what will our saviors demand for our salvation. They're no longer willing to buy our funny paper; they want hard assets. To save ourselves, we must sell ourselves and be owned in a way we've not seen since the London banks held Yankee lock, stock, and barrel in the days of Queen Vic.
- Our creditors do not fear a systemic devaluation of the dollar. They fear an unsystemic devaluation that would disproportionately affect them as large holders. That's why they're willing to go along with the various shams intended to make this look like a systemic deval. They want to buy themselves time to convert their Yankee paper into something solid.
- Billmon is exactly right that this is a crisis because dollars have stopped cutting it. We acted as if they would always cut it (i.e. that people would always accept dollars and dollar equivalents), that is no longer the case, it's too late to change course, and now we'll have to put some serious skin in the game.
Welcome to the desert of the real world.