with US foreign debt exploding - China holds over $740 billion in US treasuries and Japan over $630 billion - the US government will have a tough time paying back all these loans.
this explains why US CDS rates are currently higher than Campbell Soup's.
but a strange thing happened in the CDS market this week. european sovereign cds plummeted. specifically, cds on switzerland. certainly the updraft in the global markets helps explain this, but, switzerland cds went from 260 bps to 180 bps basically overnight. the major reason for this price drop was that switzerland decided to purposely devalue their currency.
funds that had been making money off the rise in expectations for default by european countries got destroyed. it's tough to bet against a country that has a printing press for their cash.
devaluation will clearly result in inflation in switzerland. but it helps them more easily pay off their debts.
Russia seems to devalue the ruble on a semi regular basis. perhaps they are doing this to allow for a soft landing in order to prevent what happened in 1998 when the ruble lost 71% of its value overnight.
with the US foreign debt piling up and demand for treasuries waning, it is not hard to imagine a day when a US president gets on national tv and announces that your dollar has a fraction of the buying power it had earlier that day. the specter of inflation is looming. perhaps it will take a year or two to kick in, but all the money we are paying for bailouts has to come from somewhere.
the nixon shock - where the US unilaterally obliterated breton woods - probably enabled us to finance the winning of the cold war. but floating currencies create a lot of uncertainty - more on the nixon shock to come. in the meantime, think about investing in hard assets - like gold, barrels of oil, real estate and non perishable food.
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