Sunday, February 7, 2010

USA Default is Now Certain

Below is a quotation from:

"When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. . . .

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months - an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So... where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central bank, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves."

Official government-manipulated figures show that the unemployment rate dropped in January from 10% down to 9.7%. At the same time, the report shows that 20,000 more jobs were lost in the same month.

I'm not sure how they reconcile those figures, unless a lot of people are now working two jobs.

The unemployment figures do not really tell us how many unemployed people there are. It only tells us how many are receiving unemployment checks. When those checks cease, those who remain unemployed are re-classified as "unemployable" or "discouraged." It is assumed that they have stopped looking for work, and so they are not longer unemployed!

Last December the government originally reported job losses at 85,000, but they have now revised those figures to 150,000. Figures for January show another 20,000 jobs slashed from payrolls. And yet the unemployment rate went down to 9.7%. Go figure.

". . . the figures for December were revised to show 150,000 jobs were slashed from payrolls, instead of the 85,000 job cuts first reported."

From the same article above, we read,

Morgan Stanley's Wieseman and Greenlaw said they are getting "closer to calling the peak in the unemployment rate." Still, the unemployment rate could bounce higher again if workers who dropped out of the job hunt are encouraged enough to jump back in.

In other words, if a lot of people believe that the job market is opening up again, and they actually start looking for work again, then the unemployment figures will "bounce higher again." Why? Simply because the official figures do not really count all the unemployed; they merely count those who are actively looking for work.

Trouble in the Eurozone

The recent default of Dubai World is having a huge but hidden effect upon the rest of the world. Dubai is probably the main source of the derivatives market, and so their default will affect many other countries.

Then there is Greece, Portugal, and Spain, all of which are in or near default. They call this "sovereign default," when nations default on their loan payments.

America, too, is going to have to cough up $3 Trillion in payments on its short-term debt this year. There is not enough production in the entire economy to do that. The Fed will have to default or create still more trillions out of thin air.

This economic problem is not going away, nor can it be resolved by throwing more new money at it. New money merely creates more debt. While that policy may solve the problem in the short term, it only increases the problem long term. Of course, they are hoping that postponing the problem will give the economy time to turn around before the ship hits the ice berg.

Most nations have been postponing the problem by quick fixes and by "stimuluus" programs that only make things worse long term. No one recognizes the 10-ton elephant in the living room. It is the fact that the Treasury must BORROW money from the Fed in order to maintain a supply of money in circulation, instead of issuing Treasury Notes that are debt free.

Until we repeal the Federal Reserve Act and give back the power to create money to the Congress, the problem will only get worse, the private bankers will only get richer, and the people will be left impoverished in their own land.

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