The Second August Drama

Talks of a US default is in the air. The question is.... Why?
... well, to me its only about adjustment demanded by the lenders, the financial world is witnessing these adjustment time and again in our history after the 2nd Great War. In past, these adjustments came in many different shapes, i.e. end of gold standard, Nixon forced devaluation of dollar, introduction of snake and tunnel, ERM breakout, Negative interest rate on deposits and now the US default. Just think about it, US is printing the dollar for a long long time, the lifestyle most of the western countries have is because of the debt they have created, but the simple rule of lending business is that if you are in debt and you want more then you have to nod to lenders demand.

We all know that the cure prescribe by the economic doctors after the financial crisis of 2007, was merely to support a few big investment banks. The money pumped has failed to lift the economy or job market, this is a fact known to entire world now. In fact, if you dig this matter further I am sure you would conclude that these smart bankers borrowed money from the Fed lent it to US government and made them pay for their own money.

This is the story going on all around the world, in Pakistan SBP provides money to banks through open market operation, banks lend that money to government through bills, notes, bonds and Sukuk auction and pays interest to these banks. When liquidity tightens SBP pumps money into the system through OMO and marry go round.

Now, just consider this case for US.... the lender says.....  you are already in too much debt (I call it senior debt) and now you want more (Junior debt). In the lending business the senior debtor will not allow you to borrow more if you do not upgrade his compensation and how can that be done, you can not increase rate of return (a difficult task if not impossible). But this can be achieved by devaluation of dollar, which will reduce the bond prices and increase rate of return. No worries about the adjustment, after all we are paying haffty compensation to our staff they will manage it. But as it can not be done in Nixon style two doses of 10% devaluations. You create ambiguity in the market, retail investors would lose and we will mint money out of.  Not only from the bond market but from the Stock and commodity market as well. Thus, I call it 2nd August drama.

This will give enough time to make trillions, so what if it means higher food prices to the rest of the world.