Bankruptcy of the U.S. now certain

[rambone]

This is depressing.

Bankruptcy of U.S. 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 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.

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.

Note: Porter Stansberry examines these issues in much greater detail in the November issue of his newsletter, which he considers the most important he's ever written.

 

[mettle]

Who will own the debt then? It is scary to think of who will want to lay claim to my children; if that's the case.... the enforcers better come armed.

 

[henktermaat]

I believe Obmamama and fellow feinds are bankrupting the USA on purpose... it plays into his socialist "see, capitalism doesn't work" plan. What happens after that is the scary part.

 

[Golfminer]

It will be back to the barter system, and not that many people have gold or pure silver hidden at home. What will be the best trading asset?

 

[dburkhead]

It will be back to the barter system, and not that many people have gold or pure silver hidden at home. What will be the best trading asset?

"We deal in lead, friend."

 

[jblomenberg16]

"We deal in lead, friend."

This!

Gold and Silver will retain some long term value because they are precious metals.

But in a short term crash of a economy, they won't be all that valuable as short term currency. There won't be vendors and retailers that are gonna suddenly convert over to gold. And how do they make change? Bartering for needed goods, like food, clothing, ammunition, medicine, etc. will be what would dominate the short term.


Now, longer term, after any sort of melt down, the gold and silver would be valuable, as they can be converted into any new form of currency that would come about.

 

[dburkhead]

This!

Gold and Silver will retain some long term value because they are precious metals.

But in a short term crash of a economy, they won't be all that valuable as short term currency. There won't be vendors and retailers that are gonna suddenly convert over to gold. And how do they make change? Bartering for needed goods, like food, clothing, ammunition, medicine, etc. will be what would dominate the short term.


Now, longer term, after any sort of melt down, the gold and silver would be valuable, as they can be converted into any new form of currency that would come about.

Got it in one! I've come across the idea of common calibers of ammunition as currency (with .22 being "small change") in a "SHTF" to "TEOTWAWKI" scenario before. Think I first encountered it in reading various gun mags way back when I was looking at becoming a police officer about 25 years ago.

 

[jblomenberg16]

Something I've always wondered was if in an emergency, the US would sell "emergency" bonds domestically, much along the line of War Bonds. Of course anyone today can buy US goverment bonds, so I'm talking about a special issue of bonds here.


The circumstances are compeltely different that past issuance of War Bonds, but the reasons are the same - need to raise short term cash.

I wonder if anyone would buy them, especially if it meant the difference between a creditor coming to collect collateral for the debt, and remaining solvent.

The problem of course is that those bonds would need to be sold at a HUGE discount because they will almost certainly hold very little value in the future as a result of inflation and or the devaluation of the dollar.

 

[Hoosier Gun Coat]

"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."

What about that foreign real estate & farmland.....

 

[Wabatuckian]

Wouldn't this be sorta' like sicking a collection agency on The Magnificent Seven? Just sayin'....

 

[ThrottleJockey]

The debtors to worry about are the UN, the IMF, and the world bank. It's a rather convenient segway to a unilateral government wouldn't you say?

 

[Wabatuckian]

Let's just say, for the sake of argument:

Any foreigners we owe money to, we just say, "Tough crap."

If they persist, pull the trillions in foreign aid we have out all over the world.

Better yet, send them a bill for bailing their asses out of WWII... This goes back this far, at least.

Use the money to pay our domestic debts (you know, to the taxpayers).

We have better weapons and training than most of the rest of the world. I guess I see this as a "come take it" sort of scenario.

In my view, we don't owe the world a damned thing. They owe us. Payable by cash, cashier's check, money order, or crude oil.

Josh

 

[ThrottleJockey]

Any foreigners we owe money to, we just say, "Tough crap."

If they persist, pull the trillions in foreign aid we have out all over the world.

Better yet, send them a bill for bailing their asses out of WWII... This goes back this far, at least.

Use the money to pay our domestic debts (you know, to the taxpayers).

We have better weapons and training than most of the rest of the world. I guess I see this as a "come take it" sort of scenario.

In my view, we don't owe the world a damned thing. They owe us. Payable by cash, cashier's check, money order, or crude oil.

I know huh. If only it were that simple. The powers that be don't want any of that, they don't want our debt paid......They want to enslave us. They want to own us.

 

[Shadowbeach]

.

 

[ThrottleJockey]

Use the money to pay our domestic debts

Did that, called it "stimulus" and "bailout" to keep the public from being outraged.

 

[dross]

Nobody's going to show up to "collect our debt." It doesn't work like that.

There's an easy way out of this mess - grow the economy. Reduce restrictions, leave free enterprise alone, cut taxes severely. National debt is only important as a percentage of GDP. If we grow our GDP, the debt shrinks as a percentage, and ceases to become a problem. Kind of like if you have credit card payments of $500 per month, it's crippling if you make 20K per year, but if you make $100K per year, the same payment is easy to make.

The problem is that Obama and Congress seem to be doing everything possible wrong for the economy that can be done. I can't decide if they're stupid (well, Pelosi is for sure) or if it's a master plan to ruin this country (which I believe Obama hates) and create the latest socialist utopia.

 

[6birds]

Nobody's going to show up to "collect our debt." It doesn't work like that.

There's an easy way out of this mess - grow the economy.

(sarcasm on) Would you please quit pissing in the campfire here! How are we to work ourselves in a frenzy with all this talk of a simple plan and a little hard work! You're killing my panic buzz!! (sarcasm off)

(Another) Great post, keep them coming.

 

[Agent 007]

.

 

[ruger17hmr]

I've always thought that, no matter how much our national debt is, it is only relevant when indexed against our GDP....much like Dross explained. If that's the case, we are nowhere near "bankruptcy." GDP could potentially fall some in the future, with harmful economic policies and government overspending. But the fact remains that the US is the most powerful country in the world, by far. In fact, the GDP of some STATES is greater than many other NATIONS. In addition, we are, by far, the most powerful country militarily. No one is going to come to "collect" anything from us, regardless of what the economy does.

Here is a chart of our national debt, indexed against GDP, since 1940.

I'm not sure exactly what the national debt means to the average working American. I do think it's silly to think that some nation is going to invade us to collect debt.

Agent007, I am glad to know that not everyone is swayed by all this gloom and doom, which has debilitationg effect on already down trodden unemployed and under-employed people of this country.

The economy is cyclical in nature, there will always be the Busts and Booms. We will survive this adversity as we have done in the past. We have faced and battled worse conditions before and have overcome them.

 

[cosermann]

Gold and Silver will retain some long term value because they are precious metals.

But in a short term crash of a economy, they won't be all that valuable as short term currency. There won't be vendors and retailers that are gonna suddenly convert over to gold. And how do they make change? Bartering for needed goods, like food, clothing, ammunition, medicine, etc. will be what would dominate the short term.

It did not work that way during Argentina's most recent collapse.
Dealers sprung up quickly to convert gold/silver to cash.
Bartering did not work very well due to the significant inefficiencies of matching traders. Ammunition didn't become currency, etc.
Change is still a significant problem.

If you want to learn more you could google "FerFAL" and read his many forum and blog posts (or read his book). He's lived through it and has some insight, although how any individual situation might work out is difficult to predict.

http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999%E2%80%932002)
SURVIVING IN ARGENTINA
SURVIVING IN ARGENTINA: Post SHTF currency