Liquidity Programs and Opportunity Costs: U.S. Loss and China’s Gain

Yesterday, the Fed scaled back two of its liquidity-providing programs and announced it would let a third one expire on July 1, 2009.
Each program was designed to provide liquidity to securities dealers and money-market funds that couldn’t raise funds in the capital markets. The Fed noted that none of the programs were used anywhere close to capacity. And the improving economy and loosening of credit markets has made the programs less necessary.
Investors took this as good news because it suggests the economy and financial system is starting to stand on its own. It’s also good news because it shows the Fed is willing to be somewhat proactive in shutting off liquidity.
To me, this is more important.
*****In one form or another, the U.S. government has made (read:created) something like $11 trillion available to fight this recession. (I’m not sure anyone knows the exact number.) The government has been widely praised for its response to the financial crisis. Its moves are credited with averting a more serious problem.
But that’s only half the job, and it’s the easy half, at that. I expect many of you have seen how a toddler reacts when it’s time to give up the pacifier. Kicking and screaming is an understatement. And that’s exactly how it will happen when the Fed really starts taking away the liquidity pacifier for good.
Alan Greenspan never had the stones to give the U.S. economy the tough love it needed. And Wall Street became a spoiled bunch of delinquents.
Will Bernanke have what it takes to guide the U.S. economy from dependent child to responsible adult? We’ll see. And we better hope so, because I suspect the stakes are even higher this time around…
*****While the U.S. is creating debt to support its economy, China is using its currency surplus to secure raw materials. I mentioned yesterday that China’s state-run oil company Sinopec (NYSE:SNP) is trying to acquire an oil exploration company for $7.2 billion. And it wasn’t that long ago that China tried to take a $19 billion stake in mining giant Rio Tinto (NYSE:RTP).
When you’re an investor, you have to be worried about opportunity cost. That’s the cost of profits that you could have made, if your investment capital wasn’t tied up in under-performing or illiquid assets.
Right now, and probably into the future, the U.S. will be suffering opportunity cost as so much of our resources are tied up in simply supporting our economy.
*****Case in point: Iraq. Iraq is one the verge of opening the deal-making process for international oil companies to upgrade Iraq’s oil fields. This promises to be a very convoluted process – the Kurds and Parliament want input and the current oil minister appears ready to bypass them both.
All Iraqis realize how important oil, and oil revenue, is to their future, and they’re all fighting to get a piece of the action and avoid the exploitive situation that occurred before Saddam Hussein kicked Big Oil out of Iraq.
For this reason, the proposed development contracts are not guaranteed. There is the risk that a subsequent Iraq government could nullify them and there would be no recourse.
The risks are high enough that Exxon-Mobil (NYSE:XOM) isn’t even sure yet if it will enter the bidding process. But I’ll bet you dollars to doughnuts that Sinopec’s parent company, China National Petroleum & Chemical Corp. will be bidding.
Now, obviously, the recession has nothing to do with Exxon’s uncertainty. But for China’s state-run oil companies, national interests are sometimes more important than profits. And that can be a good thing.

*****Now, here’s Jason Cimpl’s video analysis of this week’s action and look ahead to next week. So far he’s batting a thousand. You can view the video HERE or go directly to


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