Posted on 02/05/2010 10:50:05 AM PST by Lucky9teen
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.)
This article explains exactly what's happening to the economy, and it's not about party politics in the way we normally think about it; it's about big government socialist Democrats AND big government socialist Republicans. Together the two parties make up the FEDERAL GOVERNMENT, and right now, the federal government is colluding with the military/industrial/banking complex to bring about total government control of every American life. Politician's and banker's may have a bigger endgame in mind. They may have more nefarious intentions, but this article explains that where the rubber meets the road, this is how they'll get their control. They will use, and are using, the economy, and in particular, monetary and spending policy. The system will crash, the people will beg for help, and the price for that help will be Maoist/Marxist/Leninist socialism with Nazi police state tactics used to enforce the new rules. The article doesn't say that last part; that last part is my interpretation of what will happen as a result of financial policy.
The only way to avoid this outcome is for enough of us wake up to the hoax being foisted upon us by the two major political parties and their partner/master the bloated federal bureaucracy. Stop supporting, or even believing a word that comes from the Democrats, the Republicans or the federal government. Believe in your constitution-loving neighbor who participates in the Tea Parties. Ask them to run for office, and make sure they win. Otherwise, the system is doomed.
Those are some heavy thoughts, and after reading this article you might think I'm over doing it a bit. But it is my belief that this article really lays out how the shit will hit the fan. It will all start with a currency crisis. The government isn't going to force us to accept this new socialism at the barrel of a gun. The government is going to make sure we beg them to give it to us.
The financial situation is the key to our prison. Will the government lock us in, or will we the people turn the key and set ourselves free?
ping
Then stop raising the debt ceiling, let our loans default, and let it collapse sooner rather than later. The sooner it falls apart, the sooner we can get to work on reviving America.
ping
How about cutting out a few Depts. like Education, EPA, Commerce????
Agreed. What the hell do we have to do to get Congress to stop voting itself more credit that we’ll be enslaved to, forever? March on the Capitol and physically shut it down?
For starters.
Commerce, Labor, Education, Energy, HUD, and HHS should be the fist round. Then we’ll start on the agencies.
Add VA and Homeland Security
How about cutting out a few Depts. like Education, EPA, Commerce????
Hear Hear!
The rest of the world is going to hell in a handbasket, too... :-)
Will "we the people" cry for gubmint help?
When it crashes, it's open season on politicians, no permit required, no bag limit, you may hunt over a bait pile.
How ?
The Presses will be running 24 hour straight! until it is done!
“Commerce, Labor, Education, Energy, HUD, and HHS should be the fist round. Then we’ll start on the agencies.”
We’ll take back a few of the “islands” before beginning an assault on the mainland! LOL. Seriously, federal spending is so out of control within most agencies you can’t believe it. They never saw a program they didn’t like. No budget is ever enough for them.
I’m thinking that too. The comments I posted in Post #1 were from my brother-in-law, and I kind of agreed with them, that’s why I posted them.
But I have to say, although I can see that point, I also have to wonder, with so many people coming awake to this tyranny, I have a hard time believing we’re just going to change our minds about this government and/or decide we want their help out of this mess.
I think the lines have been drawn for too long and it’s too far to turn back now. They’ve done so much damage and I keep wondering when enough is enough, before “it’s on!”?
The bankruptcy of the American people will occur before the bankruptcy of the US federal government.
Where are we going so fast?
And why are we in this handbasket?
;)
Get rid of EPA and Biz will Boom.
The link seems to be broken.
Is the link valid?
Looks like a great article.
It's hard to figure when the crap hits the fan, we'll know it when we see it.
Note the tagline.
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