Rumors of the dollar's death: greatly exaggerated

So says Martin Wolf of the Financial Times in his most recent column. Excerpt:

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.

It's worth reading Wolf's column in full, but he makes a point there similar to one David Merkel made on his Aleph blog¹ recently [Merkel]:

Whatever country of our world has the status of reserve currency must issue debt, and a lot of it, that other countries can invest in to park their idle cash balances.

Wolf sketches out the "Triffin dilemma" this leads to: an overhang of debt that eventually undermines confidence in the reserve currency. Wolf's proposed solution is to look for an alternative to the dollar as a reserve currency, but I wonder if a simpler alternative would make sense in the near-term: instead of having surplus countries buy up U.S. debt to satiate their demand for dollar-based assets, why doesn't the U.S. government offer them an equity-like investment instead? Specifically, why not offer shares in a sort of massive master limited partnership that would invest its assets in nuclear power plants and other infrastructure, and pay dividends out of the revenues generated from those infrastructure assets?

Unlike the proceeds from the sale of Treasuries, which can go to fund transfer payments and health care for retirees, or extended military expeditions, proceeds from the sale of shares in this master limited partnership would go toward increasing productive capacity, which would fuel future economic growth in the U.S. This idea is a similar to (but simpler than) one proposed by Professor Yu Qiao of the School of Public Policy and Management, Tsinghua University, Beijing, in the Financial Times last spring.

¹Speaking of Merkel's blog, last month he asked if any readers had any stock ideas to share. I mentioned three: USEG, AYSI.OB, and DSNY.OB. As of yesterday's close, they were up 26%, 390%, and 60%, respectively.

USEG on the Move

For those who missed it, this post, contains some notes on my recent conversation with USEG management, where the management team described several of the irons the company currently has in the fire.

Incidentally, I mentioned USEG, along with AYSI.OB, and DSNY.OB on David Merkel's Aleph Blog last week when he solicited stock ideas. I noted that these companies are probably all too small for his purposes, but perhaps they might be of interest to some of his readers. Judging from the lack of comments there, apparently not. I'm guessing his readers tend toward investing in larger cap companies.

Covered Bonds

Yesterday, the Treasury Department released a best practices guide to covered bonds. Here's a link to press release, which includes a link to the best practices guide: "Treasury Releases Best Practices to Encourage Additional Form of Mortgage Finance". In a nutshell, the way a covered bond works in the context of mortgage financing seems to be like this: instead of selling its mortgage loans to the securitization market, a bank keeps those mortgage loans on its books, and issues a bond using those loans as collateral. On the surface, this would seem to be a more transparent method of financing mortgage loans than the practice of selling those loans to the securitization market, where they are then bundled into MBS (which are then bundled into more complex CDOs and other complex securities).

David Merkel provides a detailed analysis in this post on his Aleph Blog, "Covering Covered Bonds", and in Forbes, Heidi Crebo-Rediker and Douglas Rediker claim that "Covered Bonds can Rebuild America". The co-authors' grandiose claim refers to infrastructure. They write,

Monday's embrace of covered bonds by U.S. Treasury Secretary Henry Paulson and senior representatives of the Fed, the Federal Deposit Insurance Corp. and the country's largest banks to help thaw the U.S. mortgage market is a laudable step, appealing to market proponents and skeptics alike. Introducing covered bonds to the U.S. is a great idea. In fact, covered bonds can help more than just the mortgage market.

At its most basic, a covered bond is a bond issued by a bank and backed by a dedicated group of loans kept on the issuing bank's balance sheet. While the introduction of covered bonds in the U.S. is not a magic bullet, covered bonds may be more than just a way to restart the mortgage market. They may also help unlock sorely lacking investment for U.S. infrastructure.

[snip]

Elsewhere in the world, many commercial banks and specialty public-sector banks use public sector covered bonds as a cheap source of funding. In particular, as a result of the enormous availability of funds for infrastructure projects through securities like covered bonds in Europe, European banks have developed great comfort with infrastructure as a core part of their general banking activities.

Crebo-Rediker and Rediker note that, because of their familiarity with financing infrastructure,

the loans for public-private partnership infrastructure projects like the Chicago Skyway, the Indiana Toll Road, the San Diego Toll Road and the Pocahontas Parkway in Virginia all came from European, not U.S., banks.

The authors slight (unintentionally, I'm sure) Australia's Macquarie, which has been involved in financing American infrastructure projects, including the Chicago Skyway.