US threatens default to wipeout debt owed to China

Discussion in 'Foreign Relations' started by LETHALFORCE, Jun 9, 2011.

  1. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    China says U.S. "playing with fire" on debt delay - MarketWatch

    NEW YORK (MarketWatch) -- Li Daokui, an adviser to the People's Bank of China, said Wednesday that the U.S. is "playing with fire" by even considering a brief technical default on its debt in order to force more spending cuts at home, Reuters news agency reported. Reuters said Li made the comments at a meeting in Beijing. "I think there is a risk that the U.S. debt default may happen. The result will be very serious and I really hope that they would stop playing with fire," Li said, according to the report
     
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  3. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    China official: GOP 'playing with fire' with debt ceiling - The Oval: Tracking the Obama presidency

    China official: GOP 'playing with fire' with debt ceiling


    There's been an interesting warning on the debt ceiling today -- from China.

    Li Daokui, an adviser to the People's Bank of China, told reporters in Beijing, "I think there is a risk that the U.S. debt default may happen." And he puts the blame on congressional Republicans. "The result will be very serious and I really hope that they would stop playing with fire," he said.

    China is no disinterested party: It holds more than $1 trillion in Treasury debt as of March.

    President Obama may well agree with the Chinese banker's sentiment, as he urges Congress to go ahead and raise the nation's $14.3 trillion debt ceiling.

    Technically, U.S. obligations have already risen past that ceiling, but the Treasury Department says it can use accounting maneuvers to keep paying bills until Aug. 2.

    Congressional Republicans, including those who control the U.S. House, say they won't agree to a debt ceiling increase unless the White House and Democrats agree to major spending cuts.

    The two sides are negotiating -- as the world waits.

    "I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value," Li said.
     
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  4. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    China Warns Against Playing Chicken With Debt Ceiling - MarketBeat - WSJ

    China Warns Against Playing Chicken With Debt Ceiling


    A Chinese central-bank adviser warned US lawmakers against playing chicken with the debt ceiling, Reuters reports.

    “I think there is a risk that the U.S. debt default may happen,” Mr. Li reportedly said. “The result will be very serious and I really hope that they would stop playing with fire.”

    “I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar’s value,” he reportedly added.

    What he thinks is kind of a big deal, given that China is the world’s biggest foreign holder of Treasury debt.

    Treasurys are up this morning, pushing the 10-year note’s yield down to 2.97%.
     
  5. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    Strictly Numbers - Why China Has A Growing Concern About Our Debt Ceiling


    Why China Has A Growing Concern About Our Debt Ceiling

    There is an alarming concern from.our chief lenders in the far east about our potential inability to pay our debts on time.

    For sometime now the Obama Administration has been warning Congress about the dangers of failing to raise the debt limit.

    Li Daokou of the People’s Bank of China said the United States is “playing with fire” by even allowing a temporary default on our debt. There is a conventional thinking among members of Congress, mainly Republicans, that a temporary default would have little or no impact on the United States credit rating and our ability to borrow in the future.

    To gain a better understanding of this thought process you don’t have to have a PhD in economics you just have to understand human motivation.

    There are large block of Republicans in the House that want to permanently limit the United State’s ability to borrow. Defaulting on our payment obligations will making borrowing terms so painful that future officials cringe at the notion of borrowing. This is fool hardy to believe this logic.

    This will have unintended consequences that will grind the US and quite frankly the world economy to a grinding halt. In addition to the complete devaluation of the dollar, the US will lack funds to finance state and local government projects. This will lead to higher tax rates, in ability to pay for the cost of defense leaving our nation vulnerable to attack, and reducing our ability to investment in new technologies and industries creating rampant stagnation in our GDP.

    The unstable US bond market will leave the world searching for a stable investment environment, potentially removing the dollar as the world reserve currency. Governments will begin dumping US bonds into the market for fear of further default causing a panic in US markets leading to an economic banking collapse. The costs of commodities will rise resulting in higher gas prices.

    Of course I could be completely wrong about all of this, but why risk it?
     
  6. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    Moody's hints at U.S. rating downgrade - UPI.com

    Moody's hints at U.S. rating downgrade

    NEW YORK, June 2 (UPI) -- A credit rating agency said Thursday it could "place the U.S. government's rating under review for possible downgrade" if the debt limit is not raised soon.

    Moody's Investors Service issued a news release Thursday saying it "fully expected political wrangling prior to an increase in the statutory debt limit" but it said the "degree of entrenchment into conflicting positions" in Washington has gone beyond what analysts had expected.

    "The heightened polarization over the debt limit has increased the odds of a short-lived default," the agency said.

    The House Tuesday voted 318 to 97 to reject a bill that would have increased the nation's debt limit without cutting spending. Eighty-two Democrats joined all House Republicans in rejecting the bill.

    The measure would have raised the nation's $14.3 trillion debt limit to $16.3 trillion without any accompanying spending cuts.

    The vote was pushed by Republican House members, a move Democrats said was nothing more than political posturing.

    "Moody's Investor Services said … that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the U.S. government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default," the statement said.

    "If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction."



    Read more: Moody's hints at U.S. rating downgrade - UPI.com
     
  7. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    Fitch Will Downgrade U.S. Rating If Treasury Notes Aren't Honored


    Fitch Will Downgrade U.S. Rating If Treasury Notes Aren't Honored


    NEW YORK (Walter Brandimarte, Daniel Bases and Burton Frierson) - The United States probably wouldn't be able to maintain its prized AAA sovereign ratings status if it suffered even a "technical" default on its debt, Fitch Ratings said on Wednesday.

    The rating agency also warned it would downgrade the U.S. sovereign ratings to "restricted default" in August if the government fails to honor Treasury notes and some coupon payments on Treasury securities due on August 15.

    "Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective and though such an event (such as a short-lived Treasury bill default) may not permanently impair the capacity of the U.S. government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term," Fitch said in a statement.

    Fitch added, however, that it believes U.S. lawmakers will ultimately reach an agreement to raise the country's debt ceiling and avoid any default.
     
  8. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    China Left Holding Worthless US Debt | USA-wethepeople.com

    China Left Holding Worthless US Debt, Japan out of Picture Now


    Well as the talking heads explained on the financial and political shows the real story coming out of Japan is they are out of the business of buying US debt. This debt was estimated to be $898 billion in February 2011. China is the largest holder of US debt at $1160 billion. Japan was purchasing $6.4 billion in debt per month while China has actually been reducing it’s exposure to the dollar selling $4 billion worth of debt between November and December of 2010.

    What was gradually happening, the collapse in the bond market will accelerate. With China limiting their exposure and reducing their holding of US debt and Japan preoccupied with tsunami relief efforts and rebuilding the outlook for the dollar just got a lot dimmer.

    The end of Japanese purchases of US debt for the foreseeable future

    The next largest purchaser of US bonds is England with $272 billion worth. It is worth noting Great Britain did purchase $29.6 billion worth of securities from November to December of 2010. So now we look to the British to bail us out? Last time I checked the Brits owed almost as much as the US in debt as a percent of their GDP.

    Hope and change. More like Cloward and Piven. Bill Clinton was smart enough to reverse himself. Our affirmative action idiot is out playing golf. I know now what it must have been like to be a dust bowl farmer with a crippled leftist elitist pig in the White House in 1935. No hope and a slow steady march towards world war. We are truly paying the price political correctness and there is no end in sight.
     
  9. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    Should America Stiff China?

    Should America Stiff China?

    I shall leave aside for now the strategic question of whether America shouldstiff China, i.e. repudiate our $3 trillion in obligations to them. Strategically, repudiation of debt and other instruments on this scale is obviously something analogous to the atomic bomb in warfare: a very extreme option, with serious negative side effects, and not something to be taken lightly.


    My question in this article is, rather, the ethical question: does America have the rightto stiff China? Frankly, we quite arguably do.


    Any serious ethical argument on this question turns upon the fact that China has not honored obligations it has assumed towards us, so therefore we are not obliged to honor our obligations towards it. This sounds like a technicality, but in fact, China’s failures to honor its obligations run into the trillions of dollars.


    Let’s start with currency manipulation. China engages in this practice to a massive degree, spending roughly a billion dollars a day to drive down the renminbi-dollar exchange rate. And yet China has agreed, by becoming a signatory to the Articles of Agreement of the IMF, not to do so. Article IV, section 1 of this document—which China voluntarily signed—reads:


    Each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall:… (iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.


    (See http://www.imf.org/external/pubs/ft/aa/aa.pdf)


    The next big area of unethical Chinese behavior is the theft of American intellectual property. The most obvious and superficial case of this is rampant Chinese copying of American DVDs and other entertainment materiel, together with fake designer handbags, watches and the like. But the more serious kind of intellectual property theft concerns industrial know-how.


    Although China committed, when it joined the World Trade Organization in 2001, to crack down on such theft and start to uphold the standards on the issue that developed nations uphold, it has not done so. Instead, with government acquiescence and best and proactive help (sometimes with the aid of Chinese intelligence agencies) at worst, it has continued to steal. As reported by the Irish journalist Eamonn Fingleton in his book Jaws of the Dragon,


    The story began as long ago as 1980 when Beijing agreed to join the World Intellectual Property Organization. Various laws were duly promulgated that ostensibly provided Western owners of trademarks, patents, and copyrights with extensive protection against theft.


    After American corporations complained that these laws were mere window dressing, Beijing assured first Washington and then the World Trade Organization that it would tighten enforcement. Yet all the evidence is that the problem has just kept getting worse--so much so that China was recently reckoned to account for fully two-thirds of all the world's output of pirated and counterfeit products.


    Moreover, China's counterfeiting style has in recent years developed in a way that poses a qualitatively different, much more devastating, threat than previously. Whereas in the 1990s China confined itself largely to producing rather obvious knockoffs of luxury items such as Rolex watches and Louis Vuitton handbags, these days it is heavily involved in producing fake versions of everything from General Motors spare parts to Otis elevators.


    China also exports vast quantities of counterfeit pharmaceuticals, most notably drugs like Prozac Viagra, which sell particularly well on the Internet. Not only does such counterfeiting damage American corporate interests but it raises major questions of consumer safety. In recent years there have been many reports of deaths caused by Chinese counterfeiting activities. In Panama in 2006, more than 100 people died after taking cough medicine laced with a toxic Chinese-made ingredient.


    As documented by the author Tim Phillips in 2005, whole cities in China are devoted to various counterfeiting specialties. The city of Yiwu in eastern China even functions as a sort of “Wall Street” for the industry, providing a vast marketplace where, Phillips states, 100,000 counterfeit products are openly trade and 2,000 metric tons of fakes change hands daily. Meanwhile, as Edmund Andrews of the New York Timeshas reported, in big cities like Shanghai, vendors still openly sell pirated goods even along major thoroughfares.


    Not only has the Chinese government turned a blind eye to all of this, but large sections of the Chinese establishment, not least many sons and daughters of top leaders (know to China watchers as “princelings”), are heavily implicated in the racket.


    The value of this stolen property must be accounted for in any calculation of what America owes China on net. This is not a minor issue in a modern technology-based economy—which must, by definition, be a know-how based economy. (According to a 2006 study by the Federal Reserve Board, America’s investment in this and related intangible assets like research and development , computer software, workforce training, and spending to build brands exceeds its investment in tangible assets.)


    The cost to American industry is not only the licensing and other fees that should have been paid and were not. The cost includes also the long-term contracting of America’s industrial base due to counterfeit competition and the destruction of our capacity to innovate and invent due to depriving inventors of their just reward.


    Finally we come to the most fundamental Chinese violation of its obligations to the U.S. Despite having committed on paper to engage in free trade with us—a commitment that we have honored to a fault—China in reality closes its own markets to its trading partners.


    China’s protectionism doesn’t only mean obvious policies like tariffs and quotas; it also includes local content laws, import licensing requirements, and subtler measures (some of them covert, hard to detect, or infinitely disputable) such as deliberately quirky national technical standards and discriminatory tax practices. And it includes outright skullduggery such as deliberate port delays, inflated customs valuations, selective enforcement of safety standards, and systematic demands for bribes.


    The quantitative size of these Chinese repudiations of assumed obligations? Well, if we take seriously the claim by neoclassical free-trade economists that trade naturally tends towards balance, then we must conclude that their size is equal to China’s gigantic accumulated trade surpluses with the United States.


    Interestingly enough, the size of China’s accumulated American assets, because these derive from these accumulated trade surpluses, corresponds fairly closely to the size of China’s accumulated cheating. Which suggests—not proves, suggests—a certain poetic justice if America were to repudiate these obligations. Perhaps it’s not the prudent thing to do (at least at the present time), but we shouldn’t feel guilty about considering it, especially as it’s one of our strongest forms of leverage for negotiating a better solution.
     
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  10. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    Should We Cancel the National Debt? | The Freeman | Ideas On Liberty

    Should We Cancel the National Debt?

    This question is popping up more and more. The idea of canceling the debt seems to gain support in direct proportion to the increase in the debt itself. Should we or shouldn’t we? At present levels, the national debt is about $5 trillion. It grows by hundreds of billions each year. Current levels of federal spending will add about $1 trillion more in debt over the next four to five years.

    As the debt grows, government’s interest burden grows with it. The more of our tax dollars consumed by interest, the fewer dollars available for discretionary spending. What’s worse, more pressure is then exerted to use tax increases to fund mandatory spending programs, such as Social Security, Medicare, and Medicaid. To illustrate how the interest burden is growing, consider this: in 1963, the federal government spent just 6.9 percent of its total budget on net interest. By 1993, the total interest outlay was 14.1 percent of total spending. But judging interest as a percentage of spending is not the real story. We all know government spends more than it collects. The federal interest burden exists simply because government, like you and me, must actually service its debt. Interest, of course, represents the cost of debt service.

    To see a true measure of the problem, we should examine interest payments as a percentage of revenue collected, not as a percentage of total spending. Congress only spent a total of $92.642 billion in 1963. What’s more, the federal government ran a very small deficit. As a result, the amount of interest paid as a percentage of revenue collected was still around 6 percent. By 1993, however, Congress collected $1.153 trillion, and spent $292.502 billion on net interest. That puts the interest component of total federal revenue at 25.3 percent of revenue collected. As you can see, that is nearly double the less telling number of 14.1 percent.

    This problem is exacerbated when we add to the mix the question of entitlements. Entitlements include those programs which guarantee a payment to citizens. Chief among them are Social Security, Medicare, and Medicaid, but entitlements also include federal pensions of every description. As these mandatory spending demands increase along with interest payments, the government’s latitude to spend elsewhere, including for defense, is greatly inhibited. Consider this observation from the opening remarks of the Final Report of the Bipartisan Commission on Entitlement and Tax Reform. At page 4, we are handed this most sobering bulletin: “The gap between federal spending and revenues is growing rapidly. Absent policy changes, entitlement spending and interest on the national debt will consume almost all Federal revenues in 2010. In 2030, Federal revenues will not even cover entitlement spending.” (emphasis added)

    Even if Congress resolved to balance the budget tomorrow (which we know it will not do, since it turned away the Balanced Budget Amendment), it will continue to face and be forced to handle interest on the $5 trillion debt it has already amassed. Market conditions, not the government, will dictate what interest rates will be paid. As a result, the question of its interest burden is largely uncontrollable.

    The next question then is, why not begin paying off the debt? That of course is what a reasonable person would do, and that is what every American family would have to do under similar circumstances. But before it would make sense for you to start paying off your debt, before it would do any good for you to do that, you must first stop going further into debt. And this the federal government has steadfastly refused to do.

    In his Wall Street Journal article of February 9, 1995, Stephen Moore, director of fiscal policy studies at the Cato Institute, discussed some problems inherent in paying off the existing national debt. The following is a portion of Mr. Moore’s observations:


    Here’s an experiment. What if we were to try to pay off the $4-plus trillion national debt by having Congress put one dollar every second into a special debt buy-down account? How many years would it take to pay off the debt? One million seconds is about 12 days. One billion is roughly 32 years. But one trillion seconds is almost 32,000 years. So to pay off the debt, Congress would have to put dollar bills into this account for about the next 130,000 years—roughly the amount of time that has passed since the Ice Age. Even if we were to require Congress to put $100 a second into this debt-buy-down account, it would still take well over 1,000 years to pay the debt down. (emphasis added)
    Neither Moore nor Cato has specifically called for repudiating the national debt. However, others have. And the call is not new, but facts as sobering as those Steve Moore presented provide fuel for the fire. The day Moore’s article appeared in the Journal, Rush Limbaugh began talking about repudiating the debt. Like Moore, he did not specifically say the debt should be repudiated. However, he misunderstood the clear message of the article.

    The underlying premise of the article was not to suggest or argue for repudiation of the debt. Rather, it was to emphasize the magnitude of the problem and to create a sense of urgency for the idea of a balanced budget. As I said earlier, the debt cannot even begin to be addressed until we begin to live as a nation under a balanced budget. That is the mandatory first step. Without taking that step, nothing else matters. Instead of realizing that point from the article, Rush Limbaugh used the facts presented to jump to the conclusion the debt could “never be paid.” He did not specifically state it should be repudiated, but he did say economists should begin to address the ramifications of doing so. In response to a caller who phoned with his position on the matter, Rush contended he did not understand the full ramifications of repudiating the debt, and thus stopped just short of making the claim.

    To Repudiate or Not

    So, my question to you is, based upon the above facts, should we repudiate the debt or not?

    Before we answer the question, let us understand exactly what constitutes the “national debt.” We hear the term over and over, but we also hear much misinformation about it. For example, we should begin by learning to whom this debt is owed. Many times, politicians will say, “We owe it to ourselves.” In fact, one of the callers to the Rush Limbaugh program that day said, “If we owe it to ourselves, why not just repudiate it?” If you owed your home mortgage to “yourself,” you might be inclined to cancel the debt. And if you did, what difference would it make? Who, if anybody, would be hurt by that act? If you truly “owed it to yourself,” perhaps nobody would be hurt.

    Let us understand, however, that the United States does not owe the money “to itself.” Just as you owe your home mortgage to the organization that loaned you the money to allow you to purchase it in the first place, the federal debt is owed to specific creditors. How does one become a creditor of the United States? To finance its deficit spending, the federal government must do exactly what you and I do before we can spend money we do not have. It must first borrow that money. When the United States borrows money, it must enter into a promise to repay the debt. It is no different than your home mortgage. If you borrowed $100,000 to buy or refinance a home, you must guarantee the bank you will pay back the principal, with interest at a stated rate, within a stated period of time.

    Bonds and Bondholders

    When the United States borrows money, it does much the same thing. Instead of signing a mortgage note, however, government issues debt instruments. The debt instruments assume three forms. Long-term debts take the form of bonds, medium-term debts take the form of notes, and short term debts take the form of bills. When the United States overspends by, say, 300 billion in a given year, it raises the money to pay the difference by issuing these debt instruments. The Treasury first decides how much of the debt is to be financed through long, medium, or short term obligations. It then offers these obligations to the public through an auction. For simplicity’s sake, I will refer to all government debt instruments as bonds.

    The government debt instruments— bonds—are purchased at auction at a discount to their face value. The deeper the discount, the higher the rate of interest the government will pay to the bondholder. The smaller the discount, the lower the rate of interest the Treasury will pay. The bond discount rate, and hence the interest rate, is largely determined by Federal Reserve interest rate settings and the market place. The point is, government does not set the rate. Bonds are sold, like anything else at auction, to the highest bidder, assuring the lowest rate for that particular issue.

    The bond is an obligation not unlike your own mortgage note. The United States agrees to pay the bondholder a specific principal, at a stated interest rate over a fixed period of time. The entirety of the federal debt, some $4.8 trillion, is financed in this manner. Thus, the United States does not owe the money to “itself,” it owes the money to bondholders. They are the parties who lent their cash to the government to finance its operations.

    But who are these bondholders? When the Treasury offers bonds for auction, the largest segment of the bonds are purchased by major brokerage houses. Institutions such as Salomon Brothers and Merrill Lynch purchase major blocks of these debt instruments. They in turn resell them to individual investors. Of course, they sell them at a rate which allows the brokers to make money on the transaction. However, the brokerage fee can easily be avoided by purchasing bonds “Treasury direct,” which in effect, bypasses all broker middlemen.

    The ultimate purchasers of government bonds fall under three categories: (1) foreign governments, (2) institutional investors, such as banks, insurance companies, mutual funds and pension funds, and (3) individual citizens. This answers the question “To whom do we owe the money?”

    In the February 1995 Treasury auction of two- and five-year notes, we find that more than $25 billion was raised through “competitive tenders from the public.” In addition, another $1.5 billion was awarded to “Federal Reserve Banks as agents for foreign and international monetary authorities.” (See Public Debt News, U.S. Treasury Department, February 22, 1995.)

    Repudiation Fallout

    Now that we understand to whom we owe the debt, let us explore the likely consequences of repudiating the debt. I have classified the fallout into three types of problems: small scale, medium scale, and large scale. Let us take them in ascending order.

    Small-Scale Problem. From the government’s point of view, a small-scale problem is created for the individual holders of government bonds. If the federal government defaults on payments, those owners—a person here, a person there—lose part of their savings. To the extent that that person invested to save for his retirement, to build a college fund, or to buy a home, that money is lost. Is that the end of the world? Ask the guy who loses his savings. If he’s young enough to recover over time, maybe not. Maybe he can swallow the fact that his money was stolen from him by a dishonest government. Maybe he can work extra hard in the remaining productive years he has left to make up the difference. Maybe.

    What about those millions of older or retired citizens who have invested heavily in government bonds because of the “guaranteed” safety and return on investment? Suppose such a person is 65 years old. Suppose his entire life savings is invested in bonds, and he is dependent on the interest every month to keep him out of soup lines. How will that person recover from having his money stolen from him by a dishonest government?

    Medium-Scale Problem. If you’re not an owner of government bonds, what do you care? If those people were shortsighted enough to put all their eggs in one basket, maybe they deserve what they get. Maybe you don’t have to worry because your money is invested with your insurance company, or mutual fund, or even better, in your company’s pension fund. But maybe you should worry.

    The largest investors in government bonds are institutional investors such as these firms and banks. With nearly $3.5 trillion in pension cash alone invested throughout the world, a huge share of that money is in “guaranteed” government bonds. There are hundreds of billions more invested through insurance companies. Add to that the billions in mutual fund investments and you start to appreciate the problem is quite a bit broader than just a few old people losing some spare change.

    I submit to you that if you have any kind of life insurance policy, pension fund, or mutual fund investment of any kind, you are the proud owner of federal government bonds at some level. If the government defaulted on these obligations, it would send shock waves through the entire financial market. It would destabilize much of the insurance and pension sector, and could spell the outright destruction of countless mutual funds. Even if you do not own an insurance policy or pension fund of any kind, I would be surprised if you did not have a bank account. Banks also invest heavily in government bonds.

    I suspect that if the federal government were to default on bond debts owed just to the banking industry, the fallout would make the S&L crisis look like a mere bank overdraft. In fact, by defaulting on government bonds owed to banks, my guess is the entire commercial banking industry would be destabilized, risking the money of every depositor, large and small.

    Large-Scale Problem. But even if the financial markets were rocked, pension and insurance funds were lost, and millions upon millions of American citizens lost money to a dishonest government through bank closures, that is not even the worst of it. The worst is the effect it could have on our world trading partners and military allies. Hundreds of billions more in federal debt are owned by foreign governments, foreign insurance companies, and foreign mutual funds. Japan alone has helped finance American deficit spending for decades, to the tune of billions. If the federal government defaulted on debts owed to these foreign investors, our government would likely face financial retaliation of immeasurable proportion.

    For example, I could well imagine all assets of U.S. investors in foreign nations being frozen by that government. You don’t think that can happen? The United States does it all the time. Remember the Gulf War? After Iraq invaded Kuwait, some $2 billion in Iraqi assets held in U.S. banks were frozen by executive order of President Bush. If we can do it to foreign investors in the United States, why can’t foreign governments do it to U.S. investors?

    And that may not even be so bad. What could be worse is the prospect that a foreign government may nationalize the assets of U.S. companies located in that country. By the way, the term “nationalize” is how governments refer to the act of stealing what does not belong to them. Is it all that hard to imagine, for example, the government of France or Germany nationalizing the assets of Ford Europe in an effort to recoup its own losses? During the 1950s, U.S. businesses lost billions when Castro’s government took over Cuba and nationalized all U.S. assets held in that nation.

    Even if the affected foreign governments did not openly retaliate against U.S. assets held in their country, what effect do you suppose repudiation of debt will have on our military alliances? Do you suppose the governments of the Western world will be so quick to jump to the aid of any United States interest after they have had billions stolen from them by a dishonest government? Don’t bet on it.

    The bottom line is, repudiation of the federal debt would be fundamentally immoral. It would constitute a dishonest act of the highest order. The ramifications would be felt in every home in the country, and every capital in the world. The United States could be ruined politically, financially, and perhaps militarily. After all, how many of our government’s military actions are financed through borrowing?

    But, as the saying goes, every cloud has a silver lining. If the government of the United States repudiated its debt to investors, you can be sure we would have a balanced budget, whether Congress liked it or not. That is because nobody would ever lend the United States another dime!
     
  11. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    S&P Warning: What U.S. Debt Danger Means for World Economy - The Curious Capitalist - TIME.com

    What the U.S. Debt Problem Means for the Global Economy


    Since the time of the Founding Fathers, U.S. leaders have believed in the concept of American exceptionalism, that the U.S. is a special country with a special mission. It is a notion that continues to this day. And when it comes to the threat its deteriorating national finances present to the world economy, the U.S. is truly exceptional. That danger was finally made clear by Standard & Poor's on Monday, which changed the outlook on its U.S. sovereign rating to negative – in other words, the S&P is threatening to downgrade the U.S. from its traditional triple-A status. The implications of this move are incredibly far-reaching. No, it doesn't mean the U.S. in on the verge of a debt crisis. But it does mean the world can't act like an elephant isn't in the room. We've seen a debt crisis grip Europe and worries mount over the financial state of Japan. Those problems are scary enough. But when it comes to terrifying debt-crisis scenarios, the U.S. stands in a universe all its own.

    That's not because the U.S. debt burden is the biggest – Japan's government debt is more than twice as large, relative to its GDP – but because of the exceptional role the U.S. plays in the global economy. A debt crisis in Portugal could send ripples of uncertainty through world financial markets, and if a larger country like Spain fell into crisis, those ripples could prove mighty destabilizing. But U.S. debt runs the risk of crashing the entire operating system of the global economy. Here's what I mean:

    Not only is the U.S. the world's largest economy – by far – but it also dominates the global monetary system. In many respects, the entire architecture of global finance is built upon the U.S. economy. Its capital markets are the most liquid. The dollar is the world's No. 1 reserve currency and the primary one used in foreign exchange transactions and trade. Countries like China and Japan have their national wealth stored to a great degree in U.S. debt. When investors get nervous, they rush to U.S. dollar–based assets, and especially U.S. debt. The perception has always been that the U.S. is the ultimate safe haven. Even as its financial condition sickens, that perception remains. Despite a dramatic increase in U.S. deficits and debt in recent years, the country has still been able to borrow at exceptionally low rates. In other words, the U.S. has benefited tremendously from its economic exceptionalism.

    Now let's speculate on what would happen if that perception fundamentally changed. U.S. Treasury securities would be seen as riskier and would therefore become less attractive. Interest rates would rise in the U.S. as a result, not only making it harder for the government to finance budget deficits and debt, but also raising borrowing costs across the economy, slowing investment and consumption. The U.S. dollar would weaken, undermining the value of currency reserves around the world and speeding us along to the day when the dollar is no longer the world's premier currency. All that would be destabilizing enough. It would likely mean slower growth in the world's largest economy, deteriorating living standards for Americans, and thus slower growth for the entire world economy.

    But the bigger problem would be, What would take America's place? The U.S. is the standard by which risk is assessed in financial markets. If the U.S. isn't a safe haven, then what is? And what country's currency and capital markets are deep enough to accommodate the world's wealth if America's can't? Here's how Mohamed El-Erian, chief executive at PIMCO, put it on a blog post on the Financial Times website on Tuesday:

    The world looks to America for a range of "global public goods" — including the reserve currency, the deepest and most liquid government debt markets, and the "risk free" standard. With no other country able and willing to step into this role, the result would be global efficiency losses and a higher risk of economic and financial fragmentation…The time has come for the US (and other advanced economies) to take better control of its fiscal destiny—for the sake of American society and for the well being of the global economy.

    Even though America's exceptional role in the world economy makes its debt situation exceptionally dangerous, that role also apparently gives the U.S. exceptional protection as well. In theory, the S&P warning is a signal that the U.S. is not exceptional, that if it doesn't get its financial house in order, it will face downgrades just like those of Greece, Spain and Japan. But the markets told us something very different. Treasurys weakened immediately after the announcement, a sign that investors were selling them, but then quickly recovered their strength. What's that, you say? Yes, rather than scaring investors away from U.S. debt, investors actually bought U.S. debt after the S&P warning. And the reaction from some major U.S. bondholders showed little concern about America's financial standing. "We continue to believe that U.S. Treasurys are an attractive product for us," Japanese Finance Minister Yoshihiko Noda told reporters.

    Sound crazy? Not really. The world has a lot at stake in the continued stability of the American economy, and thus every incentive to keep U.S. debt from roiling the world economy. This gets us back to the exceptional position of the U.S. in world finance. With nothing to replace the U.S., the country is getting exceptional treatment from the global economy.

    It seems to me that U.S. policymakers have been banking (perhaps subconsciously) on this very outcome – that the U.S. is simply too exceptional to face dangers other nations could never avoid. They've been acting this way. The U.S. is the only heavily indebted developed economy that doesn't have a credible plan to control deficits and debt. (Japan doesn't either, but because of the need to soften the blow from last month's devastating earthquake, we'll give Tokyo a pass here.) In other words, the U.S. is counting on being like AIG or GM and acting as if it is too big to fail.

    Is that true? American exceptionalism will give Washington an exceptional opportunity to fix its financial mess without suffering the consequences of other debt-heavy nations. But what if the U.S. fails to grasp the opportunity? Can the U.S. and the world economy escape the fallout? Now that would be truly exceptional.
     
  12. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    and who is going to allow the americans to get away like that till the time they do not heavily compensate in other forms? and no its not just a china thing, a country which is cash rich and will be in a decent position to take the shock. americans certainly do not japan to bite the dust with very aggressive russia and brazil, with many more ready to join the league, the only real option they have is to prolong the process.

    not so long back there were calls by prominent people within the GoI to further invest in these debts, india, needs to thank saner voices who put their foot down or the american looby within would have now put india in a huge financial jeopardy, india's exposure stands at 32.9b usd and it is advisable for india to go low on this holding slowly and steadily without causing any alarm bells.

    Amount wise exposure of each Country to US Debts:

    [​IMG]
     
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  13. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    Republicans Are Pushing For A "Brief" Default As China Warns US Is "Playing With Fire" | zero hedge

    Republicans Are Pushing For A "Brief" Default As China Warns US Is "Playing With Fire"

    Yesterday Reuters reported that a troubling, yet potentially inevitable development may be imminent: the default of the US, granted, a short-lived one (though we are not sure just how the world's "reserve" currency will be backed by a national that is technically insolvent). Luckily for the US, everyone else (except China) is just as bankrupt. Yet if there is one thing pushing Lehman into competitive bankruptcy just so that Goldman would have a monopoly in the US fixed income sales and trading market, it is that any such action will have massive downstream consequences, and in the pyramid of "unpredictable downstream effects", the insolvency of the US is at the very top. And just to make it clear, now that a default is becoming a palpable option, China announced that the United States is "playing with fire" if it opts to briefly default on its debt, which could undermine the dollar, Li Daokui, an adviser to China's central bank said on Wednesday. Yet the statement could very well backfire after Li, speaking on the sidelines of a forum, said China needs to dissuade the United States from defaulting on its debt, but he believed China may hang on to its investment in U.S. Treasuries in any case. This is precisely the case made by Stanley Druckenmiller: in fact, should there be a technical default, US bonds will become a true safe haven investment as America will for the first time take a step to indicate that it believes the relentless abuse of its fiscal situation is coming to an end.
     
  14. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    TR what can any country do to collect?? US is still a military power that cannot be challenged and if anyone pushes too hard they will be at the receiving end of a military solution. USA can also pick and choose the nations who's debt they wish to honor or not or who will be in what place on line. But USA does not seem to have any intentions of paying this debt.
     
  15. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    the data up there looks old to me, if i can recall well (though i might be completely wrong), india's exposure stood at around 56b usd and that of china's around 1.1t usd.
     
  16. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    This is fairly accurate upto March 2011.
     
  17. Tianshan

    Tianshan Regular Member

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    It is bad, but where else we can put the money?

    No one can borrow as much as USA can.

    $3 trillion is too much currency reserves, need to be reduced.
     
  18. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    BBC News - China's US debt holdings jump 30% easing financing fear

    China's US debt holdings jump 30% easing financing fear

    According to the Treasury Department's revised figures, Beijing's total holding of US debt was $1.16 trillion (£712bn) in December, up $268bn from an initial estimate two weeks ago.

    China is the largest foreign holder of US securities.
     
  19. SHASH2K2

    SHASH2K2 New Member

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    Distribute that money to poors . That will increase domestic consumption of your economy. :D
     
  20. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    How will it be reduced when there is no market for US debt and US govt is defaulting??
     
  21. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    quite frankly LF i have no clues what all these countries would do, but it will certainly give rise to a situation where all the rest will be pitted against the US, at least the rest will find a common cause for once against the US. i am not so concerned about the rest, but more about india, where in our case if my memory serves me well, the exposure is at 56b usd or close to 17% and there abouts of our forex reserves and it will be a huge shock for our economy to get over with for quite some time to come and we could as a result take a big hit in our economic growth with investor sentiment on a tail spin and we do not have a govt which can do much about it nor do think we have government which will swiftly move out of this mess for we tend to be too concerned about how the other will take it than how badly a thing will effect our people and economy.
     

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