Monday, June 20, 2011

The Real Global Debt Crisis Is At The US Treasury

WE ALL KNOW Greece has a debt problem.  Specifically, Greece cannot pay the interest on the debts that it owes.  Greece needs €12bn in financial aid, or it will default on its sovereign debt in mid-July.  But what about the debt woes of the United States of America? 

Treasury Secretary Tim Geithner is calling on Congress for a $2 TRILLION financial aid package so that the USA can avoid a sovereign debt default of its own on August 2nd.  Headlines in the financial press around the globe are focused on the debt woes of Greece.  They should be focused 24/7 on the debt woes of the USA.

Greece is asking for a $17 BILLION loan to "keep the party going", and put off their inevitable debt default to a time that is more convenient for the European banks.  The USA is looking for $2 TRILLION to extend the road it's kicking the can down, and nobody seems to want to talk about it?

Debt ceiling: Time's running out
It's T minus two weeks until July 1. That's the chosen deadline for the small bipartisan group of lawmakers negotiating a debt-reduction "framework" to accompany an increase in the country's debt ceiling.

Even that deadline, however, will make it hard to end the debt ceiling drama by Aug. 2, when the Treasury Department says it will no longer be able to pay all the country's bills in full without being allowed to borrow.

If Greece and the United States, or any sovereign nation for that matter, needs to borrow money to pay it's debts, haven't they already technically defaulted on their debts?  If you don't have the money to pay your debts you are broke...end of story. 

"I have written to Congress on previous occasions regarding the importance of timely action to increase the debt limit in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens," Geithner wrote. "I again urge Congress to act to increase the statutory debt limit as soon as possible."

How does borrowing money to pay off debt protect the full faith and credit of the United States?  Wouldn't the need to borrow money to pay off debt be a red flag to a creditor?  If the United States must borrow money to pay it's debts, and that money is "backed by the full faith and credit of the United States" wouldn't the value of the money they needed to borrow come into question immediately by those that held or were were being asked for a loan?


Greece is asking for a $17 BILLION bridge loan.  The United States is, by asking to raise it's debt ceiling, seeking a $2 TRILLION bridge loan.  Which of these two countries should really be in the financial headlines associated with "debt default'?

US Is in Even Worse Shape Financially Than Greece: Gross
By: Jeff Cox
When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco's Bill Gross told CNBC [last] Monday.

Much of the public focus is on the nation's public debt, which is $14.3 trillion. But that doesn't include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.

The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.

Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.

"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."

China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

( - China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.

Treasury bills are securities that mature in one year or less that are sold by the U.S. Treasury Department to fund the nation’s debt.

Mainland Chinese holdings of U.S. Treasury bills are reported in column 9 of the Treasury report linked here.

Until October, the Chinese were generally making up for their decreasing holdings in Treasury bills by increasing their holdings of longer-term U.S. Treasury securities. Thus, until October, China’s overall holdings of U.S. debt continued to increase.

Since October, however, China has also started to divest from longer-term U.S. Treasury securities. Thus, as reported by the Treasury Department, China’s ownership of the U.S. national debt has decreased in each of the last five months on record, including November, December, January, February and March.

Russia Joins China In Rejecting U.S. Debt, Buys Gold Instead
From Gold and Silver Blog
On Saturday, the Wall Street Journal reported that Russia also decided that holding U.S. debt has become too risky. In comments to Dow Jones, Arkady Dvorkovich, chief economic adviser to Russian President Medvedev, said "The share of our portfolio in U.S. instruments has gone down and probably will go down further." According to the Wall Street Journal, Russia has already reduced its holdings of U.S. debt from $176 billion last fall to $125 billion in April of this year.

The Dollar at a Crossroad
By Thomas G. Donlan
Contrary to well-nurtured popular belief, the U.S. has defaulted before without the dire consequences Bernanke outlined in his speech. In 1933, the government defaulted on its debt backed by gold by abrogating the gold clause in Treasury securities.

Wall Street, the record shows, was delighted. The Dow Jones Industrial Average was at about 53 the day before Franklin Delano Roosevelt was inaugurated. By July, it was over 100, and 1933 remains the second-best annual percentage gain ever recorded for the dear old Dow.

A remnant of the gold standard was in the system widely accepted after World War II, by which the dollar was accepted as good as gold by all other countries. Then, in 1971, Richard M. Nixon explicitly defaulted on this gold exchange standard, withdrawing the American promise to pay gold for dollars held by foreign governments.

Our creditors hardly blinked. The world moved on to floating rates for paper currencies and floating prices for gold as for other commodities, but the dollar remained the reserve currency, as if it were good as gold.

Can we be three times lucky?

However insincere the full faith and credit of the U.S. government is, it's based on the productive capacity of its people and the enormous value of their physical property and real estate. It's not about whether we can pay; it's about whether we will pay.

Credit is character, and the American character is being tested this summer.

Some may ask, "is the US Government really at risk of defaulting on their debt?" 

Well not if the US Government is willing to print the money to cover it.  But printing money to pay off it's debt is "in effect" a default on it's debt obligations as they are paying the debt back with money that is worth less than the day their creditors borrowed it to them.  So, technically, the United States can avoid defaulting on it's debt by paying back the Dollars it borrowed, by printing and then borrowing more,...but it will be cheating it's creditors to do it by paying them back in devalued Dollars.  Is it any wonder then, that the Chinese, the Russians, and Bill Gross, the world's largest bond fund manager [just to name a few], have ALL decided to cut their exposure to US debt?

So then, is Treasury Secretary Geithner's warning that it would be "disastrous" to not raise the debt ceiling simply another ruse by the Treasury to scare the Congress into authorizing "funding" much like the ruse used to get Congress to pass the $800 BILLION TARP program to "rescue the too big to fail banks"?

Charles Krauthammer, in his syndicated column, suggests that although Secretary Geithner's warning may be accurate, "he is disingenuous when he suggests that we must do so by August 2 or the sky falls.  There is no drop-dead date. There is no overnight default."

"What scares Geithner is not that we won’t be able to pay our creditors but that his Treasury won’t be able to continue spending the obscene amounts of money (about $120 billion a month) it doesn’t have and will (temporarily) be unable to borrow."

The United States can't miss any debt payments, it cannot afford to.  The threat that the US might default on "some of it's debt obligations to "force" spending cuts is foolish.  The US government will not miss any interest payments on it's debts anytime soon because doing so would make future borrowing costs increase, and effectively cancel out any "supposed" gains from the forced spending cuts.

There's No Such Thing as a Temporary U.S. Default
The Atlantic, (Daniel Indiviglio), On Thursday June 9, 2011
What if the debt ceiling debate causes the U.S. to miss just a couple of interest payments, say for the months of August and September? As long as the Treasury resumes payments in October, then no harm done, right? This misconception was put to rest by the rating agency Fitch in a statement yesterday. The firm makes clear that there's effectively no such thing as a temporary default: the nation's rating will not quickly bounce back.

At this time, the Treasury is already taking "extraordinary measures" to meet its debt obligations, since the debt ceiling needed to be raised in May. In August, those extraordinary measures won't be enough, and the Treasury must prioritize debt payments above its other obligations to avoid default. At that time, the U.S. will be in "technical default" even if it doesn't miss a payment.

But if the Treasury is forced to (or chooses to) skip a debt payment at that time, serious consequences will follow. If that occurs, real, tangible, lasting harm to the U.S. economy will follow. In past weeks, the rating agencies Moody's and Standard and Poor's have both cautioned that the debt ceiling fight could have serious consequences. But no warning has been quite as clear as that issued on Wednesday by Fitch. Walter Brandimarte at Reuters reports:

"Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective," Fitch said in a statement.

"Clearly the political signals which are coming (from Washington) are a source of concern," David Riley, head of sovereign ratings at Fitch, told Reuters in an interview.

Treasury bonds could be rated "junk" by Fitch Ratings if the government misses some $82 billion in debt payments by Aug. 15 due to disagreement over the debt ceiling.

The ratings would go back up once the government fulfills its debt obligations but probably not to the current AAA level, Fitch said.
If an interest payment is missed, the U.S. will have more expensive debt for years, until it manages to convince the agencies to restore its top rating. For that time period, it will be even harder for the U.S. to get its fiscal house in order, because some of its tax revenue that could have been used to pay down debt will instead have to go towards higher interest payments than would have been required on AAA-rated debt.

The threat of a Greek debt default may be the most immediate threat to the global banking system, but it is the growing US Debt, and it's costs to finance that debt, that are the biggest long term threat to not only the global banking system, but to the value of what the world considers to be money at this time.

$17 BILLION for the Greeks is chump change.  $2 TRILLION for the US Government that's worthy of some headlines

“Gold is not an investment. It is money,” says James Turk
James Turk of the GoldMoney Foundation speaks about currency devaluation and the rising gold price. He also explains why gold should be considered money and not an investment. “When you’re looking at gold, it goes into the bottom part of your portfolio, the liquidity part of your portfolio. And when you’re evaluating whether you want to own gold, you evaluate it against other currencies of the world, other monies of the world,” he said.

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