The financial world has its knickers in a twist right now over the fact that Barclays Bank in Britain (and perhaps/probably up to 20 others others, including former golden bank J.P. Morgan) attempted to manipulate the LIBOR (London Inter-Bank Offered Rate) market, which is the hinge rate affecting something like $800 trillion-worth of financial instruments. (Can that number–$800 trillion—possibly be right? It is the figure The Economist cites.) Gee—bankers trying to affect a market to get larger spreads and, therefore, larger profits: who could have ever imagined it? The Wall Street Journal reports this morning that at least nine government regulatory agencies in six different nations are on the case. Bankers can expect a complete colonoscopy before this is over. Too big to flail? (Our mordant pals at ZeroHedge celebrate the laughable fact that Barclays just won a “Bank of the Year Award” from the financial magazine Euromoney, which is a bit like Bernie Madoff winning a charity award the day before he copped to his swindle.)
Without excusing big banks trying to manipulate a market unfairly or illegally, I wonder if we’re looking at the right parties in the interest rate manipulation game, and whether the consequences of a story running right alongside this bank “scandal” isn’t a whole lot more significant. Yesterday the central banks of China, the Eurozone, and the U.K. all cut interest rates close to zero (mimicking our Federal Reserve) supposedly so as to spur economic growth. As the Journal explains this morning, “Central bankers hope cheaper credit will induce businesses and households to borrow, spend and invest to boost growth. Lower rates could also reduce the burden of past loans on borrowers.”
About that last bit—it clearly isn’t helping some borrowers, such as Spain and Italy, whose sovereign 10-year borrowing costs continue to hover between 6 and 7 percent. But these near-zero interest rates are helping one borrower in particular: the United States Treasury. U.S. ten-year borrowing costs are hovering near 1.5 percent. Shorter-term U.S. debt is close to zero. One reason for this is that the dollar is simply the least-worst currency at the moment; as such, the Eurozone crisis benefits U.S. borrowing, meaning we can borrow a lot more for a lot longer than the Euro nations that have to fess up to the spendthrift ways. But even with the dollar looking better than other currencies (the notable exception is the Swiss franc, which recently experienced a negative-interest rate offering), it is not private investors putting their savings into our sovereign debt instruments: the majority of U.S. debt at the moment is being bought by the Federal Reserve itself. Translation: we’re simply printing money. Lots of it. Lots and lots and lots of it.
Now, maybe this won’t end badly, with a burst of inflation somewhere down the road. But it certainly means the U.S. government can continue to act irresponsibly for a longer period of time. Great: just what we need with Obama in charge. Exit question: do you think Obama and his Treasury Secretary Doogie Howser really want the Eurozone crisis fixed any time soon? And which government regulatory agency will look into this massive market manipulation? Right. Got it.
I’ll say it again: Gold. And canned goods. And ammo.