This afternoon I co-led a forum on the financial crisis with my Evergreen colleague Peter Bohmer. I had a flash as I was preparing: at some future point we could be in for a reverse tsunami.
Here’s the idea: A real tsunami begins with an outward flow of water. If you’re standing on the beach and suddenly the water line retreats 10 or 20 meters, it’s time to race for higher ground. Now consider the opposite phenomenon. The massive Fed/Treasury spending spree to hold the crisis at bay, thus far unsuccessful, is being financed by a massive capital inflow. Some of this comes from foreign CB’s eager to do their part, but a big part is the result of global capital flight to the supposedly least risky currency. Suppose we get out of this alive and calm returns to the markets. Most of those people are going to want to bring their money back—that’s the reverse tsunami. How do we finance that? The Fed’s balance sheet will be wall-to-wall junk.
OK, just getting to that moment will be a big victory.
Your reverse tsunami scenario is a little like the circumstances leading up to the second (1949) UK devaluation. UK government debts were around 250% of GNP, but were mostly denominated in Sterling. Devaluations are not painless, but I believe that was one of the least painful.
ReplyDeleteDoesn't Warren Buffett use a similar analogy? He says when the tide goes out, you can see who is swimming with their pants off.
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