Commentary by William Pesek
Nov. 25 (Bloomberg) -- As Barack Obama takes over from George W. Bush, he may need to borrow an idea introduced by another U.S. president viewed as an economic failure.
In the late 1970s, Jimmy Carter issued $6 billion of debt in foreign currencies such as the deutschemark and Swiss franc. The move was aimed at halting a precipitous drop in the U.S. dollar. The securities, dubbed “Carter bonds,” did little to help Carter’s legacy.
Tokyo-based economists, including Kazuo Mizuno of Mitsubishi UFJ Securities Co., say President-elect Obama, faced with enormous and growing debt obligations, will consider selling debt in yen and other currencies. Should markets begin making room for “Obama bonds?”
Obama’s Treasury Department wouldn’t take such a decision lightly. After all, countries only resort to such securities out of weakness, and investors know it. It would be politically devastating for Obama to be seen emulating any of Carter’s financial policies. Carter’s tenure is synonymous with stagflation and economic malaise.
Then again, the U.S. must be creative in financing the untold amounts of debt it will issue to stabilize banks, boost growth, pay for two costly wars and fund programs such as Social Security. Can we really dismiss out of hand the U.S. eventually selling foreign-currency debt?
Financing Gap
A year ago, few would have believed Lehman Brothers Holdings Inc. would fail and that Citigroup Inc. would need a government- backed rescue. Few would have expected the U.S. government to enter into the insurance business and perhaps the automobile trade. Few would have thought the Federal Reserve would adopt the “quantitative easing” policies of the Bank of Japan. And yet, here we are.
Soon enough, credit-rating companies may wake up and begin downgrading the U.S. government. Asian central banks will grow tired of seeing their dollar investments lose value. And the U.S. currency may increasingly suffer from the kind of treatment Jim Rogers intends to give it. Within the next few months, the chairman of Singapore-based Rogers Holdings, plans to own no dollars at all.
Nations can’t simultaneously maintain trade and current- account deficits without ample financing. If purchases of government, agency and corporate debt dry up -- especially among foreign buyers -- the U.S. will find itself in a very bad way. Milton Friedman’s view that deficits are sustainable, particularly for a country that issues the reserve currency, is about to be tested as never before.
Obama Bonds
No one seriously expects the U.S. to default on debt. Yet issuing foreign currency-denominated Treasuries could reduce the perceived risk of holding U.S. debt.
“The U.S. cannot finance its deficit by itself,” Mizuno told Asia Times Online last week. “The U.S. financial system cannot survive without foreign investors. We will see Obama bonds in the future.”
These also are confusing times in Tokyo, where the BOJ is faced with the prospect of cutting its 0.3 percent benchmark rate. Governor Masaaki Shirakawa thinks he can avoid returning rates to zero. He’s wrong, and the quicker that central bank officials realize it, the better.
The more one looks at Fed Chairman Ben Bernanke’s handiwork, the clearer it is that he’s following the BOJ’s example. The Fed has pumped far more stimulus into the banking system than its 1 percent benchmark rate would suggest. It has even moved to shore up central banks in economies such as Singapore and South Korea.
Creativity Needed
U.S. debt managers will need to get creative, too.
In 2001, Japanese lawmakers proposed issuing “Koizumi bonds,” named after former Prime Minister Junichiro Koizumi. He was a rock star of sorts with shrieking female fans, long hair and all. If David Bowie pulled off selling bonds, why not Koizumi? Had the bonds been issued, the proceeds would have funded structural reforms and stimulus measures.
Investors who loaded up on the Treasury inflation-protected securities, or TIPS, introduced by President Bill Clinton’s administration, can’t be happy as price pressures wane. It may be time to roll out debt linked to deflation.
If deflation is in the cards for the U.S., expect the Fed to employ even more drastic methods. Over time, all that liquidity is sure to take a toll on the dollar’s value and reduce the attractiveness of U.S. debt.
Crash Course
The yen is as good a currency as any to consider. Japan’s finance industry has made quite a business with “samurai bonds,” yen-denominated debt sold in Japan by foreign issuers. The U.S. government would merely become Tokyo’s biggest customer.
Debt managers will inherit a record U.S. budget deficit. The bond dealers that advise the Treasury this month forecast a $988 billion shortfall for the financial year ending in September 2009. Treasury Secretary Henry Paulson last week said the government will issue $1.5 trillion of debt.
Ballooning debt doesn’t seem like a major issue now because there’s “excess demand” for Treasuries rather than excess supply, as investors flock to government debt as a haven, former Treasury Secretary Lawrence Summers said at a forum in Washington last week.
Yet the next Treasury team will get a crash course both in crisis management and planning for the U.S.’s financial future. Obama bonds could indeed be part of the plan. Stranger things have happened, and in the last 12 months alone.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
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