Without Manipulated Treasuries, We'd Be Greece: Opinion

Editor's note: This piece was updated to include a chart by Institutional Investor's Sovereign Wealth Center.

NEW YORK ( TheStreet) -- Dana Blankenhorn says without oil, we'd be Greece. I say, without artificially cheap Treasuries (that's cheap money for the U.S. Treasury, expensive for investors), we'd be Greece. Large "purchases" of U.S. Government Debt by the Federal Reserve system, at yields that are well below core inflation, induce other market participants to purchase, hold and trade Treasuries, when they should run away. This is all going to change, in my opinion. (My last article explains the vulnerability of the Fed in some detail.)

For decades the United States retained one competitive edge we may soon surrender -- the unchallenged ability to turn accounting entries into stores of value by printing new Federal Reserve Notes. Without this advantage, America is even weaker than Greece, as we have daunting liabilities.

Everyone is concerned with a U.S. default of its debt, but America has long been "defaulting" by repaying investors who purchased our debts years ago with dollars that steadily have declined in value. Do we really think the American Dream remains alive forever, if we relentlessly crush the worth of our currency?

America has been a net importer for decades. A weak dollar may help the trade deficit but it will slaughter the capital balance, particularly given the confidence destroying recent history exhibited in political battles across America.

Unless Americans rise up and demand rapid, responsible change in the way we run our collective finances, the fate of our country is not as bad as Greece -- it is likely far worse.

For lack of a better alternative, global investors and political leaders have grudgingly accepted "dollar dominance" even as they question the financial position of our Federal Reserve System and the credit quality of our Federal Government.

How much longer can the Fed serve as "buyer" of last resort for U.S. Government debt securities, priced at unrealistically low interest rates, to fund our yawning deficits?

Startling change could come swiftly, when the largest foreign investors in the world revolt and work together to create an alternative to the Federal Reserve and other troubled Central Banks. After all, they have built up mammoth financial resources. I believe it really could happen.

According to Institutional Investor's Sovereign Wealth Center, the eight largest sovereign wealth funds alone control an estimated $2.9 trillion in assets. They include Government Pension Fund Global (Norway) $723.9 billion; China Investment Corporation $575.2 billion; Abu Dhabi Investment Authority $405.0 billion; Kuwait Investment Authority $322.0 billion; State Administration of Foreign Exchange (China) $300.0 billion; Government of Singapore Investment Corporation $279.0 billion; Qatar Investment Authority $175.0 billion; and Temasek Holdings (Singapore) $173.3 billion.

These investors and others could easily decide to create a new, large financial institutions, rivaling "populist" Central Banks. Any "deal" that emerges from the backrooms on Capital Hill means little to those whose job it is to protect the trillions of dollars in wealth built up since global commerce began. If vast stores of accumulated wealth were able to flow into new securities denominated in a liquid, widely accepted alternative to our greenback, our Federal Government deficit would explode.

Meaning, if there were an alternative to Treasuries -- a liquid, large set of issues whose principal value was safer and whose interest rates were set above "inflation" -- Treasuries would have to compete so their rates would rise and the cost of funding the deficit-plagued U.S. would soar.

Imagine what would happen if Federal Reserve banks did not dominate auctions of U.S. Treasury securities. How far below par would notes and bonds issued since Dec. 31, 2008 trade?

Imagine how much equity the combined banks in the Federal Reserve System would then need to raise if global market participants forced these banks to use "mark-to-market" accounting.

Should viable alternatives emerge to using the United States' dollar as an accepted store of value, America would no longer be able to run a massive deficit in our goods' trade with other nations.

Our Central Bank will no longer be able to distort global financial markets by suppressing key benchmark interest rates and by intervening in much smaller national and regional capital markets.

Moreover, America will have to get real about the mission and operation of our Federal Government. We will not be able to police the world, to keep our borders open, to ignore the massive fraud endemic in Washington, D.C. -- a place where the stench of crony capitalism and corruption is undeniably odiferous.The fate of the American dominated global capital system actually hangs by a thread.

Already, America's largest foreign creditors must be angry as they watch our politicians in both parties prove the United States government will not follow rules we impose on other nations.

How long will From elites in China to beleaguered salary men in Japan -- how long will those who hold dollar-denominated American debt buy the theory that America is "entitled" to material prosperity that it cannot fund without borrowing?

No one who examines the Federal spending problem alongside the financial profile of combined banks in the Federal Reserve System can credibly claim the present reality in America is viable for much longer.

Politicians in both parties are hooked on easy money made available to Americans because no other tenable alternative exists to the dollar. However, more than six years have passed since early 2007, when the first signs of the most recent collapse started to appear in plain sight. Since then, mega investors have had time to lighten some of their exposure to our dollar and prepare for alternative currency regimes.

How long before the largest investors in the world fall out of love with hostage takers at the Fed? How long before they also press other thinly capitalized central banks, domiciled in debt-ridden, deficit wracked nations whose populations have tipped upside-down with too many seniors and too few youth and rising adults?

It is sad that American politicians today are no different than predecessors in Ancient Greece described by Thucydides some 2,400 years ago:
"their judgment is based more upon blind wishing than upon any sound prediction; for it is a habit of mankind to entrust to careless hope what they long for, and to use sovereign reason to thrust aside what they do not desire."

For decades, foreign investors have indulged Americans in a debt binge, enabled by governors of the Federal Reserve System.

America cannot swagger once the dollar gets replaced as a reserve currency for the world.

There can be no costless solutions, not when our debts are so high and when global productive capacity remains so far above demand.

American politicians will not rush to admit the truth: No nation can run government and trade deficits forever. A massive restructuring of companies, union contracts, governments at Federal, state and local levels and the Federal Reserve System is all coming soon.

At the time of publication, neither the author nor his firm held any positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Charles Ortel is managing director of Newport Value Partners LLC, which provides independent investment research to professional investors.

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