Last week, a Chinese rating agency downgraded U.S. debt from triple A and number one globally, to "double A with a negative outlook" and only thirteenth worldwide. The downgrade renewed fears that the sovereign debt crisis that began in Greece will soon reach America. That is the concern, but the U.S. is distinguished from Greece in that its debt is denominated in its own currency, over which it has sovereign control. The government can simply print the money it needs, or borrow it from a central bank that prints it. We should not let deficit hawks and short sellers dissuade the government from pursuing that obvious expedient.
We did not hear much about "sovereign debt" until early this year, when Greece hit the skids. Investment adviser Martin Weiss wrote in a February 24 newsletter:
"On October 8, Greece's benchmark 10-year bond was stable and rising. Then, suddenly and without warning, global investors dumped their Greek bonds with unprecedented fury, driving its market value into a death spiral.
"Likewise, Portugal's 10-year government bond reached a peak on December 1, 2009, less than three months ago. It has also started to plunge virtually nonstop.
"The reason: A new contagion of fear about sovereign debt! Indeed, both governments are so deep in debt, investors worry that default is not only possible -- it is now likely!"
So said the media, but note that Greece and Portugal were doing remarkably well only 3 months earlier. Then, "suddenly and without warning," global investors furiously dumped their bonds. Why? Weiss and other commentators blamed a sudden "contagion of fear about sovereign debt." But as Bill Murphy, another prolific newsletter writer, reiterates, "Price action makes market commentary." The pundits look at what just happened in the market and then dream up some plausible theory to explain it. What President Franklin Roosevelt said of politics, however, may also be true of markets: "Nothing happens by accident. If it happens, you can bet it was planned that way."
That the collapse of Greece's sovereign debt may actually have been planned was suggested in a Wall Street Journal article in February, in which Susan Pullian and co-authors reported:
"Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis.
"The big bets are emerging amid gatherings such as an exclusive "idea dinner' earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. . . .
"It is impossible to calculate the precise effect of the elite traders' bearish bets, but they have added to the selling pressure on the currency--and thus to the pressure on the European Union to stem the Greek debt crisis.
"There is nothing improper about hedge funds jumping on the same trade unless it is deemed by regulators to be collusion. Regulators haven't suggested that any trading has been improper."
Regulators hadn't suggested it yet; but on the same day that the story was published, the antitrust division of the U.S. Justice Department sent letters to a number of hedge funds attending the dinner, warning them not to destroy any trading records involving market bets on the euro.
Represented at the dinner was the hedge fund of George Soros, who was instrumental in collapsing the British pound in 1992 by heavy short-selling. Soros was quoted as warning that if the European Union did not fix its finances, "the euro may fall apart." Was it really a warning? Or was it the sort of rumor designed to make the euro fall apart? A concerted attack on the euro, beginning with its weakest link, the Greek bond, could bring down that currency just as short selling had brought down the pound.
These sorts of rumors have not been confined to the Greek bond and the euro. In The Financial Times, Niall Ferguson wrote an article titled "A Greek Crisis Is Coming to America," in which he warned:
"It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfoldingwill remain confined to the weaker eurozone economies."