“So how does America rank on the Greenspan-Guidotti scale? It’s a guaranteed default.” — Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper.
The only way out is to raise interest rates as the US dollar starts to fail. It will fail in the summer of 2010. This is a very very bad time to be in debt of any kind. He who wants to only make 2.15% on a investment (US 10 year bond) must have to leave it invested for 10 years. On the other hand, US business can get money at auction (practically free) from the central bank for .25% and invest it in Tbonds and make 1.9% for free. When the world finds out about this ponzi scheme the jig will be up.
With the US government planning to spend an extra $7.7 trillion and a national deficit of more than twelve trillion dollars, it sounds like the American public will be paying for this for the rest of their lives.
Obama has a lot to deal with with a $12 trillion debt that will increase by at least 10% in a single year. Its amazing that Bush managed to nearly double the US national debt during his time in office. With a GDP of only about $14 trillion, that debt load must be looking pretty scary for Americans.
Run on the U.S. Dollar ….Soon
Nov 30, 2009 – 04:33 PM
Porter Stansberry writes: 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. 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.
You can read the rest of the article at MarketOracle