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Bankruptcy of U.S. Now Certain

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Sunday, January 17, 2010


INVESTOR INSIGHTS
Bankruptcy of U.S. now certain
Exclusive: Porter Stansberry explains why major inflation is a sure thing

Posted: December 11, 2009
8:03 pm Eastern

 

By Porter Stansberry

 

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 percent 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.

 

(Column continues below)

 

 

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. 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 percent 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 percent 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. It has 8,133.5 metric tons of gold (it is the world's largest holder). 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 percent 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 percent 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 Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians recently bought 200 metric tons. 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 owns even 1 percent of its total reserves in gold.

 

All of this is going to lead to a severe devaluation of the U.S. dollar, which I expect to happen within 18 months. If you haven't taken steps to protect yourself from the coming devaluation – like owning gold and silver bullion, foreign real estate, and farmland – make sure you do it soon. The dollar rout is coming.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Entry #173

Comments

1.
time*treatComment by time*treat - January 19, 2010, 8:46 pm
They still have options. Various "Unification" plans and 10-289 directives.
2.
TigerAngelComment by TigerAngel - January 19, 2010, 8:59 pm
Thx time*treat. Could you elaborate a little bit on what those are? I recently read they are still selling those phoney dirivatives.
3.
jarasanComment by jarasan - January 19, 2010, 9:40 pm
I don't think we will get a collection notice,   there are so many economic pathways the US controls it would be unlikely............... if we had a strong POTUS and legislature, but since our POTUS and legislature are POSs anything can happen.
4.
time*treatComment by time*treat - January 19, 2010, 10:30 pm
From conservapedia.com: "Directive 10-289, in Ayn Rand's novel Atlas Shrugged, was an Executive Order drafted by Wesley Mouch, with the willing participation of James Taggart, Orren Boyle, Clem Weatherby, Floyd Ferris, and Fred Kinnon, and signed by Mr. Thompson, President of the United States. Its eight points were an attempt to freeze the collapsing economy of the United States at then-current levels. Instead of doing that, it accelerated the decline, strengthened the case of John Galt and his friends, and hastened the ultimate collapse of economy and government." www.conservapedia.com/Directive_10-289 is one of many sites that has the full text of the directive.
Yes, the derivatives are still out there waiting to be another crisis.
5.
TigerAngelComment by TigerAngel - January 19, 2010, 11:42 pm
OMG! Ayn Rand was a monster and out of her mind! A lot of these idiot elites (read thieves) subscribe to her loonacy including Allen Greenspan on totally free markets....yeah as in" free for all" to steal all you can that we are witnessing now. OMG could it be this whole mess comes out of her philosophy? Out of her novels....??? I'll have to go to that which you post now that you have my knee jerk reaction.
6.
Comment by jim695 - January 20, 2010, 10:26 am
Hmm ... Being somewhat of a history buff, I'm pretty sure the United States hasn't had "sufficient hard-currency reserves" equal to or greater than 100% of our foreign debt obligations since reconstruction began following the Civil War. This isn't the rocket science being presented to us by the pundits we've come to trust so implicitly; the math here is actually quite basic: If you borrow more money than you're fiscally able to repay, you're eventually going to end up in the poorhouse. Further, if you borrow more money at higher interest rates to pay your existing debts, you haven't really repaid anything; you've only managed to replace your debt with another, larger one, which you also can't repay (I'm spelling this out in terms a four-year-old could easily understand in the unlikely event that it might be read by a U. S. government economist). That's true for consumers, and it's also true for governments all over the world, not just here in America.

But there's something else that bothers me. Let's look at the following sentence from the article:

"Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The phrase "empirical support" seems to jump right off the page and, taken literally, tends to offer at least a partial explanation of how we got into this mess in the first place. The upper echelons of our government are filled to capacity with millionaires who own or serve on the boards of companies that generate enormous profits from government contracts and entitlements, so it's only natural that these men and women will do whatever is necessary to protect their interests from the same dangers and risks their competitors face in the world of free-market capitalism. Most of them have never had to work five, six or seven days a week just to feed their families, and if they should suffer (God forbid) a hangnail or a stubbed toe, it warrants a trip to a Cedars-Sinai or Johns-Hopkins trauma center, depending upon which coast their taxpayer-funded jumbo jet happens to light when the injury occurs.

Now, let's remove all the distractions from the sentence so we can really understand what it means:

"Greenspan-Guidotti is the concept that has empirical support."

Empirical support indeed. At this point, the only practical method of actually putting this concept into practice would be to replace the drowning dollar with a new currency, but we can't even do that unless we default on our current foreign obligations. It's funny (but I'm not laughing) how thousands of LP.com members saw this coming three years ago, and yet the brightest American economists (AND those who work for our government) were completely taken by surprise.

Mr. Stansberry asks, "Where will the money come from?" as if we don't already know the answer. Those of the "empirical" class can't be expected to dip into their own wallets so, out of sheer habit, they'll simply remove the money from ours. But now that the entire American middle class is drawing unemployment, I can only imagine their shock when the Empire learns that poor people, by definition, don't have any money.

Finally, I want to point out something I noticed while Christmas shopping last year. I spent about $1,200 on Christmas presents, and I tried very hard to buy products which were made in America by American workers. Much to my dismay, I discovered my goal was virtually impossible to achieve. EVERYTHING I bought carried a label that said, "Made in China," Made in Indonesia" or "Made in Taiwan." I shopped at Wal-Mart, Target, Toys R Us, QVC, HSN, ShopNBC and other stores, but I was unable to find the gifts I needed without one of those tags. Even our FLAGS are made in China! Now, I'm not an economist, but I suspect this might have something to do with our dying economy. Maybe I just don't understand high finance, but it seems to me that if we manufactured the products we buy, the money we spend as consumers might help to support our own national economy instead of strengthening foreign governments.

     Jim

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