1. Home
  2. Electronics Design
  3. OT: Money? What is that?

OT: Money? What is that?

From an investment newsletter:

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.

If you don't act right now to protect yourself from the dollar, the odds are very high you'll be wiped out over the next 12 months.

Reply to
Robert Baer
Loading thread data ...

Wasn't it pretty close to zero when Clinton left office? (I won't get into the mythical surplus thing) Something went horribly wrong on the way to Texas... And ironically the world runs on oil which Texas used to have plenty of, and now that no one wants to take greenbacks for oil, you're in for one hell of a ride!

Our little aussie bleeder is doing pretty well :-D

Dave.

--
================================================
Check out my Electronics Engineering Video Blog & Podcast:
http://www.eevblog.com
Reply to
David L. Jones

The US saving ratio is extraordinarily low, at around 2%.

In the Euro zone it is around 15%.

formatting link
r_2004/$file/kap01.html

There may be some space for accomdoation here...

-- Bill Sloman, Nijmegen

Reply to
Bill Sloman

f
y
y

formatting link

Reply to
dagmargoodboat

Clinton started this to "balance" the budget with cheaper debt.

Reply to
krw

o

The debt wasn't zero, but the deficit got close, and even showed a teensy surplus one year, IIRC.

Not Clinton's doing, though--he spent more, cut little. The budget was balanced on internet-bubble revenue (taxes). Clinton had something like 11% annual growth his last year or two in office. When that collapsed, so did the surplus.

You can dig up the figures at treasury.gov.

Gridlock was the other magic element: two years in we got a Republican Congress, which meant neither side could access the kitty jar.

He inherited a crash from Bill, sort of patched over it, then rode the housing bubble up & bailed. And he spent like a maniac. Ahh, but those were the good 'ol days--the new guy's spending makes the old guy's look tame.

-- Cheers, James Arthur

Reply to
dagmargoodboat

d
s
o
e
.

nto

That's not way Alan Greenspan describes that period. He thinks that Clinton was both smart and responsible i his approach to the economy.

Again, Alan Greenspan doesn't see it that way. He wasn't impressed by Dubbya's approach to economic management.

The news guy's spending look ss a if it isn't quite enthusiastic enough, at least to everybody who thinks that Hoover's tactics in 1929 were disasterously wrong. aka sane economists.

-- Bill Sloman, Nijmegen

Reply to
Bill Sloman

into

n

Must you always argue by authority, not from the numbers?

The treasury.gov site eventually leads you, eventually, here:

formatting link

That gives a full history of the budget of the United States.

Here you can see the spending broken down by agency:

formatting link

Or you can Google for "budget outlays by agency"

Here's what actually happened--Clinton rode the internet bubble, then passed the aftermath to Bush:

(view in fixed font) Revenue Spending growth growth ------- --------

1992 3.6% 4.3%

1993 6.8% 1.2%

1994 9.6% 3.5% 1995 8.4% 3.8% 1996 8.5% 2.6% 1997 9.4% 2.5% 1998 10.0% 3.5% 1999 5.9% 3.4% 2000 11.7% 5.6%

You can get these figures by downloading the spreadsheet from my first link, then adding columns to figure the annual d$/dt's. If you cross- check using my 2nd link you can figure out that Clinton cut defense spending--because he could--and little else.

Note that ~3.5% annual GDP growth is about the sustainable norm for a big boat like the US, but Clinton enjoyed very much more than that (you'll have to get the actual GDP numbers elsewhere if you want to nail that down exactly.) It's extremely easy to have a balanced budget with windfall revenues like that.

Bush inherited the post-bubble collapse, and the revenue disaster that went with it:

2001 -3.9% 4.0% 2002 -9.8% 9.2% 2003 -5.9% 8.6% 2004 6.9% 6.5% 2005 17.2% 8.2% 2006 14.1% 7.9% 2007 7.5% 1.9%

(Due to the fabulous economies of scale of ultra-efficient centralized government, figures from 2008 and 2009 aren't yet available.) (Of course YOUR figures better be done and accurate by April 15th, or YOU get nailed.)

Mr. Bush embarked on a) huge social spending increases, b) restoring military spending to its previous levels. He benefited as a) the Clinton massacre abated, and b) he rode the housing bubble up, to pass the bursting onto Mr. Obama.

It's kind of ironic that Bush's biggest increases included his contribution to universal socialized medicine, the Medicare prescription benefit program. Obama wants to explode that economic blackhole times four, to cover the whole country.

It's also ironic that Mr. Obama is most bitter about inheriting the results of his own community organizing for ACORN, where his activism was in pressing bankers to make those very marginal loans under the Community Reinvestment Act.

-- Cheers, James Arthur

Reply to
dagmargoodboat

et into

hen

.

That particular authority does seem relevant. Your own capacity to get meaningful information out of raw numbers isn't all that impressive - somehow, the same numbers that tell you what you want to know give other observers a rather different message.

..

n
e

Republican majority in both houses - he didn't have a lot of politcal clout to play with.

Again, this isn't the way that Greenspan saw it, and he was there, on top of the numbers, and no Democrat.

He also compounded it with a tax cut that primarily benefited the rich, who tend not to spend their windfalls during a depression, because the longer they hang onto their money, the more little guys have gone bankrupt to be bought up for ten cents on the dollar.

You do have a smaller volume of numbers to crunch.

If he had, he might have had some chance of tidying up your massively over-priced health care system and getting the price per head down to the French and German levels. The French and the Germans provide eerybody with roughly the same level of health care that only the insured enjoy in the US, for about two-thirds of the price per head.

Except that the banks weren't being pressured to make ninja (no income, no job) loans. That was their own demented initiative. The Community Reinvestment Act envisaged home loans for people who posed a greater risk of default than the people the bankers liked lending to, and basically compensated the banks as if the were going to be spending more money on doing credit checks on these less attractive borrowers.

What the banks did with this initiatve was to abandon any kind of discrimination between good credit risks and total dead-beats in a remarkable orgy of total irresponsiblity.

You seem to be totally incapable of seeing this, and put all the blame for the debacle on the Community Reinvestment Act, which certainly set the scene by allowing the banks to get away with criminal fraud until the borrowers started defaulting in large numbers.

If we applied your logic to the legal system, the people who make and sell guns would go to prison every time one of their guns was used to commit a crime, while the criminals who used the guns would be seen as the victimns of the gun manufacturers.

-- Bill Sloman, Nijmegen

Reply to
Bill Sloman

ElectronDepot website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.