Blogs & Comment

The next crisis?

Nandu Narayanan is one of the few money managers who saw the financial crisis coming. His hedge fund, Trident Global Opportunities Fund, is up 32% over the year to March 31 and up 61% over the two years to March 31.
His February reportto unit holders augments some points I was making in my column last weekon the U.S. government deficit. Specifically, he warns that the U.S. budget is addressing too many issues at once.
Washington is attempting to deal with the aftermath of the crisis while at the same time attempting to build a framework for sustainable growth through investments in alternative energy, healthcare and the like. This will push the U.S. into a deficit-spending cycle which could backfire badly, Narayanan says.
At a projected $1.75 trillion, the U.S. deficit for 2009 far exceeds the U.S. domestic savings rate and is larger than the combined surplus savings of the rest of the world. Along with previous requirements for bond issuance, the U.S. is expected to float well over $2 trillion in Treasury securities in 2009.
If the world balks at purchasing the huge quantity of Treasuries issued, we could have a bond market crisis with U.S. yields spiking dramatically. If the Federal Reserve were to step in to monetize the debt by printing U.S. dollars, it would be a Zimbabwe-style response to the problem and could trigger a currency-market crisis, adds Narayanan.
To minimize this risk, U.S. politicians should get agreement from rest of the world on how to finance the huge expenditures that are planned. But such support does not seem likely. Indeed, both Europeans and the Chinese are sounding rather unforgiving in their pronouncements on the situation in the U.S.
Such dissent does not bode well for financial stability going forward, concludes Narayanan. We are very likely setting the stage for a significant bond market crisis this year.