USA At Medium Risk For Default (Despite Ability To Print Trillions Of Dollars)

Former Federal Reserve Chairman Alan Greenspan said that the USA will not default because we can print money.

Assuming someone accepts it, that is. The Federal government continues to splurge on spending and running up the Federal debt to dizzing heights in the process.

The US does have a printing press, but is it enough? The US has a probability of defaulting on its debt of 2.59%. Or a medium risk of default.

That compares with a 93.12% of default for Greece and 52.01% for Spain, all in the high risk category. The USA is in the medium risk category with Japan.

We know that the USA suffers from a fragile economy with runaway government spending and debt. And the Congress and Administration almost had a stroke over a minuscule sequestration slowdown in the rate of government spending as if Mars was attacking.

What about our debt? It is front-loaded, meaning that it rolls over very quickly at low rates … we hope.

When you consider the USA yield curve is almost zero at the front end and not much higher on the back end, one has to wonder what will happen when the huge amount of front-loaded debt rises, say, 200 basis point.

The Fed has an interesting problem with the maturity structure of its assets purchases being longer than the US debt maturity structure.

NOW you can seen why The Fed is keeping the pedal to the metal on asset purchases. It can’t afford to let interest rate rise. M2 Money Velocity (GDP/Money Supply) continues to tank.

Money printing is not working … since the excess reserves are “sterilized” and not being loaned out. Except for subprime auto and student loans. If it ever escapes, we will have serious inflation (more than we have now).

I hope Congress and the Administrations doesn’t pull a “Cyprus” and start wealth confiscation in the form of bank deposits, 401K plans and similar.

In theory, the Fed can print unlimited $$ and buy ALL US Government debt at an interest rate of practically zero. That would allow the Government to spend unlimited $$ while paying almost no interest. While that may seem silly on the surface, if you look at the trends, that is coming closer to reality all the time.

If that happened, the masks in this farce would really be off. But don’t look to the MSN to report it. They would probably try to bury it under so much doublespeak. But professional investors would know, especially those who trade commodities. Prices of everything would spike because they were being paid for with worthless $$.

Like I said, this is happening now. The reasons the Federal Government has been able to get away with it are:
1. All Central Banks are playing the same game because EVERYONE is in bad shape
2. We still have a reputation as the World’s last, great safe haven. This is backed up by our military might and massive natural resources (which may substitute for Gold)
3. Anyone who might blow the whistle has no where else to go. Literally. As we are the world’s reserve currency.

But nothing lasts forever. Eventually, the jig will be up. And when the dam breaks, the $$ collapse will happen very fast. The real question is when. No one really knows the answer to that, not even Ben Bernake. He just thinks it won’t happen on his watch.

This is a very simple issue. The US will not and cannot run out of dollars, for the very simple reason that we can always print more.

Whether those dollars will be worth anything in real terms is a completely different question.

Hyper-inflation is of course a form of default, though not technically.

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