Thursday, February 11, 2010

"We're Doomed!" The Bankruptcy of the United States is Now Certain (The Greenspan-Guidotti Rule Revealed)

Paul Krugman says it all (Wednesday, February 10, 2010). (Is it possible to lick them anywhere else? (Or for Obama not to have been the preordained fall guy?)) "We're doomed" states Paul baldly (coming a little bit late to the party). He must be feeling pretty bad now what with cutting Obama so much slack heretofore. (Emphasis marks added - Ed.)
Oh. My. God. Obama Clueless I'm with Simon Johnson here: how is it possible, at this late date, for Obama to be this clueless?
The lead story on Bloomberg right now contains excerpts from an interview with Business Week which tells us:

President Barack Obama said he doesn't "begrudge" the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The President, speaking in an interview, said in response to a question that while $17 million is "an extraordinary amount of money" for Main Street, "there are some baseball players who are making more than that and don't get to the World Series either, so I'm shocked by that as well.""I know both those guys; they are very savvy businessmen," Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. "I, like most of the American people, don't begrudge people success or wealth. That is part of the free-market system." Obama sought to combat perceptions that his administration is anti-business and trumpeted the influence corporate leaders have had on his economic policies. He plans to reiterate that message when he speaks to the Business Roundtable, which represents the heads of many of the biggest U.S. companies, on Feb. 24 in Washington.

Oh. My. God.

First of all, to my knowledge, irresponsible behavior by baseball players hasn't brought the world economy to the brink of collapse and cost millions of innocent Americans their jobs and/or houses.

And more specifically, not only has the financial industry has been bailed out with taxpayer commitments; it continues to rely on a taxpayer backstop for its stability. Don't take it from me, take it from the rating agencies:

The planned overhaul of US financial rules prompted Standard & Poor's to warn on Tuesday it might downgrade the credit ratings of Citigroup and Bank of America on concerns that the shake-up would make it less likely that the banks would be bailed out by US taxpayers if they ran into trouble again.

The point is that these bank executives are not free agents who are earning big bucks in fair competition; they run companies that are essentially wards of the state. There's good reason to feel outraged at the growing appearance that we're running a system of lemon socialism, in which losses are public but gains are private. And at the very least, you would think that Obama would understand the importance of acknowledging public anger over what's happening.

But no. If the Bloomberg story is to be believed, Obama thinks his key to electoral success is to trumpet "the influence corporate leaders have had on his economic policies."We're doomed.

And you've heard of the Greenspan-Guidotti Rule? Right. And you wondered why Greenspan retired when he did and apologized so nicely for his "misbehavior?" He better be in hiding is all I can say. (Emphasis marks added - Ed.)

The Bankruptcy of the United States is Now Certain It's one of those numbers that's so unbelievable you have to actually think about it for a while . . . . Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from? How did we end up with so much short-term debt? Like most entities that have far too much debt - whether subprime borrowers, GM, Fannie, or GE - the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt... at ever shorter durations... at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next. 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. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger. 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.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.

I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry's Investment Advisory, which we published last Friday. Coincidentally, the New York Times repeated our warnings - nearly word for word - in its paper today. (They didn't mention Greenspan-Guidotti, however... It's a real secret of international speculators.)

Crux Note: The S&A Digest comes free with a subscription to Porter Stansberry's Investment Advisory. Porter says his latest issue is the most important he's ever written. If you don't act right now to protect yourself from the dollar, he thinks the odds are very high you'll be wiped out over the next 12 months. To learn more, click here.

This is waaaaaaaaaaaaay toooooooooooo harsh. Isn't it? Susan ______________________


rjs said...

david merkel says our choices are default, inflation, or higher taxes
quoting him: So, what do we do about it?

1) Raise Taxes. I don’t like this idea, because the US Government has entered many areas where it should not be. I would rather see the discretionary government shrink considerably. Also, remember, Social Security and Medicare are not guaranteed. Congress could wipe out all benefits tomorrow, and face a political firestorm. But remember, in the Great Depression, that is just what they did. This is why I don’t insist that rates must head higher. It depends on society as a whole.

Raising taxes has the perverse result of slowing economic growth, which affects future taxes.

2) Inflate the currency. Ugh. Oppress the elderly, who cannot work to make up the difference? Create a new inflation mindset that has all of us focusing on the short-term. Inflationary economies by their nature become more and more short term.

3) Default on obligations. There are several forms of this:

a) Total default: anyone with a Treasury Note is a sucker. Global depression ensues.

b) External default: we do not honor external obligations, but honor internal ones. Global depression ensues, but the US does relatively well.

c) Internal default: what, are you joking? Why do we pay off the losers who lent to us?

thats a start, but i see im gonna have to work on putting together a post on this...theres too much misunderstanding out there...

Jack Jodell said...

Pinch me---I'm in the middle of a nightmare! I can't believe Obama would make such a ridiculous and obviously politically-motivated statement! Taxpayers want and deserve blood from Wall Street and they're not getting it.

You know, I don't begrudge water, either, unless it's been poured down my throat to the point where it's filled half my lungs (and I'VE been the one pouring it)!

We deserve blood and we had damn well better get it! All those gambling con-men extortionists must PAY!

Teeluck said...

I know it is hard for people to face reality...but what they see now, is what I saw and went through since 2006, when those Republican thieves did this. I knew it would come to this. When a tiger asks you to dance.
If we clam up and don't have the balls to man up and ride this puppy out, then we deserve what the Republicans perfectly planned and executed.
They knew they were driving us off the cliff, they knew this would happen, they knew they would try to hang this on the President and they planned all along to say no to everything and be obstructionists, now they scream in our ear to stop the we can't stop. When you are halfway through the tunnel, you can't chicken out and go back. This is the last crucial part of their plan, to force us into a depression, just to win an election. Do you think they can solve it if they are re-elected? With voodoo economics? Even Papa Bush called it that...even he knows how to count his money...Nazi money... read about it,

The Republicans have not left a surplus for a long while, what makes you think they will if they are re-elected? They are the morons who did this. We have always been distracted by Republicans...and they are doing it right now. Listen to them...anything they say the opposite, we will stand a better chance. We are playing do not blink. Forget the bonuses for the fat cats, that is something you can fight when you have regained your economic health, right now, stay in bed, take your medicine, and let the Doctor do his job, whether it be to give Wall St. some slack to get some wiggle room to get out of the corner, or whatever else it takes. The Financial sector runs the we/he has to play ball right now. We will become stronger and we can then change the rules, for now we have to play the hand...he has to play the hand, we have to have courage, patience and confidence that we will prevail over Republican mischief.
Remember who caused this... don't let them distract you with their talking points and sound bites...that is for their neanderthal followers. Anything Rush and the clan says...the opposite is true.

carlandjerry said...

Hi Suzan,

Professor Michael Hudson is so on the pulse of this economy. The guy is really smart. Unfortunately, the neo-liberal economic barn burners in Washington are not listening.

Saw your profile. Have you been listening to the Live Astral Weeks-Van Morrison recording? I love it. It is my cd of the year!!!


Serving Patriot said...


Great post. Keep it up!