Those of us who watch the economy can hardly take a breath before the next unprecedented action occurs. This weekend (an event in and of itself), JPMorgan Chase agreed to purchase Bear Stearns for a fraction of its “value” just one month ago. The articles I read all refer to this diminution in Bear’s stock value, but the real story may be one which is as of yet unknown, that is, even at this value, did the buyer pay too much. The answer to that question depends broadly on two things, one what are Bear’s true liabilities (and that answer may be, if you had to sell it today, not much; but if you hold it together waiting for better times, maybe something). The second factor is: what did the Federal Reserve promise JPMorgan Chase vis a vis its losses? One story read stated that on Friday’s rescue deal, which of course has been mooted by the events of Saturday, the Fed agreed to cover all of JPMorgan Chase’s losses, but I have yet to read if that is still the case with this buy out.

Here is the best story I have seen on the subject of the broader market. It starts with the fact that foreign buyers of US Treasury Notes (at least at the auction of 10 year’s) decided not to make their “normal” purchases.

“The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.

It is not my view. I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.”

Then the article goes on to cover the collapse of creditworthiness of both Fannie Mae and Freddie Mac which triggered Federal Reserve action last week (was that just a week ago?).

“We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.

But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.

The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.

Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.”

Then the authors go to the China’s recent moves away from the dollar:
“The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.”

Finally, the authors look to a broader devaluation of all major currencies:
“I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit - starting with Europe.

Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.

The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.

The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.”

Here is a link: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/ccview117.xml

Michael