http://albertpeia.com/trilliondollardebtbomb.htm
‘Since the EU Crisis went into
overdrive in 2010, EU politicians have largely resorted to political posturing
rather than implementing any actual financial solutions to the EU’s debt and
banking crisis.
To clarify that
statement, we view a “real solution” as one that A) cleared bad debts from the
system, B) brought debt levels down to manageable levels, and C) got the
troubled country’s economy back on track.
By way of example,
real solutions would involve outright debt defaults, bank failures, and very
likely one or more countries leaving the Euro. However, no major EU leader ever
seriously promotes any of these ideas because doing so would akin to committing
political suicide as the rest of the political class would blame them for what
followed.
As a result, EU
politicians continue to kick the can down the road with half-measures such as
austerity measures in exchange for bailouts. The end result is that nothing is
ever solved as those in charge of the decisions that matter have no incentives
to actually do anything beneficial for their countries’ economies. See
Greece whose economy has completely imploded to the point that children are
being admitted to hospitals every week for malnutrition… and it will still have
a Debt to GDP of 120% in 2022!
It is now obvious
that US politicians have seen this work well for their European counterparts
(nothing gets fixed, not tough choices have to be made and almost no one gets
kicked out of office), and are now adopting this strategy on this side of the
pond.
Consider the fiscal
cliff issue, which our political leaders discussed endlessly for over a month,
only to then pass a “deal” which both raised taxes AND failed to cut the
deficit or debt.
Again, nothing
solved, but plenty of posturing and blame.
Expect more of this.
Today, the top story for the US is gun control even though we
will officially breach the debt ceiling in roughly one month’s time. The last
time we did this the US lost one of its AAA ratings from a credit agency and
the markets imploded wiping out over a trillion dollars in household wealth in
a matter of days.
This time around,
things will be far worse if nothing is solved. If the US loses another AAA
rating, then the financial markets could face systemic risk. The reason for
this is that US Treasuries are one of the senior most forms of collateral used
by the banks to backstop the $600+ trillion derivatives market.
As any trader who
trades on margin can tell you, when the value of your collateral is called into
question, those on the other side of the trade come looking for you to put up
more capital on your trades. This can result in assets being sold en masse
(similar to what happened after Lehman failed) and things can get very ugly
very fast.
Another consequence
of the US losing another AAA rating would be a potential spike in interest
rates as a result of us having a lower credit rating. A 100 basis point move
higher in interest rates means the US paying another $100+ billion in interest
payments on its debt. The US is slated to pay some $300+ billion in interest
payments in 2013. This amount could explode higher if interest rates rose.
We already have a
Debt to GDP ratio of over 100%. Our deficit to GDP is nearly 10%. These are Greece
type levels. And while the US has several advantages Greece does not (it
produces the reserve currency of the world and is also the largest economy),
the bond markets can be very unforgiving of fiscal profligacy.
But US politicians
don’t care. They know that the US economy is a disaster and will be getting
worse. The issue for them is not fixing this, but shifting the blame for what’s
coming onto the other party.
Bottomline: the US
debt situation is not going to be brought under control. We’ll either breach
the debt ceiling or pass some hurried bill to raise it. Neither of these will
help our credit rating or our fiscal issues.
Buckle up, 2013 is
going to be an “interesting” year.
This is why, smart
investors are already taking advantage of the lull in the markets to position themselves
accordingly. While everyone else continues to believe the fairytale story spun
by the political class and mainstream media, our Private
Wealth Advisory newsletter subscribers have already been warned of these issues
and are taking action (just as they did in early 2008 when others were bullish,
or in 2010 when the EU crisis first began to take off).
Private
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