Wednesday, December 2, 2009


Greetings good citizen,

Today the ‘stupidity index’ surged 120 points at the open and once again…parked there. It jiggled and wiggled all day and closed up at 126 points.

Once again, there is no concrete reason why the market would gain 126 points, it just did.

While it is normally my reaction to hunt down the official explanation for the market’s behavior, I decided that one frightening bit of news deserved another…

So we arrive at tonight’s offering [Hat tip: Jesse’s Crossroads café ]

Going the Way of AIG with Dollar Holders as Patsies

The Guidotti-Greenspan rule states that a nation's reserves should equal short-term (one-year or less maturity) external (foreign) debt, implying a ratio of reserves-to-short term debt of 1. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital. [What do you suppose the odds are that the US has reserves on hand equal to our ‘short-term foreign debt?]

The rule is named after Pablo Guidotti – Argentine former deputy minister of finance – and Alan Greenspan –former chairman of the Federal Reserve Board of the United States. Guidotti first stated the rule in a G-33 seminar in 1999, while Greenspan widely publicized it in a speech at the World Bank (Greenspan, 1999)

Guzman Calafell and Padilla del Bosque (2002) found that the ratio of reserves to external debt is a relevant predictor of an external crisis.

This is an interesting application of the Greenspan-Guidotti Rule by Porter Stansberry below because it includes the value of the gold at market prices, as well as the oil in the Strategic Petroleum Reserve, and all the foreign reserves on the books of the US against the total foreign debt owed in using the Greenspan-Guidotti rule for its default assessment.

Those who argue for a stronger dollar because of deflation due to domestic credit destruction overlook the reality of the yawning imbalance of US debt to external creditors, and the need to deal with it without writing it off like a home mortgage.

Yes, the US has lots of buildings, and minerals in the ground, and forests and proprietary software, and overpriced financial assets, and tranches of dodgy mortgages to sell. We are discussing AAA liquid assets here, without significant counterparty risk. Those peddling US debt instruments to Asia these days are getting a very cold reception.

What Porter Stansberry says is valid, with the important exception that the US still owns the world's reserve currency. Otherwise it would be well on its way to a hyperinflationary climax.

This is why we do not expect the default to be like the Lehman Brothers over-weekend implosion, nor as dramatic as the crisis in Dubai, or more historically the failure of the post-Soviet Russia. The US is too big to fail.

The dollar will devalue to unexpected lows, not with a bang but a whimper. [Um, it’s not going to go over well with the poor majority, in fact, they will take it rather badly…]

More AIG than Lehman, with high profile big-talking executives, self-serving accounting, bonuses to the perpetrators, de facto bailout and subsidies from frightened central bankers, and all that until the rest of the world can adjust. The US will most likely wallow in stagflation until it can get itself together again, barring a global conflict. [Where do you suppose they’ll fight this time? I’m willing to bet Europe won’t be the next battleground…]

There are structural issues for sure. The US is still the consumer of the world's export products, especially manufactured goods. The problem is that they are paying for it with paper that is increasingly worthless. And it is militarily the only remaining superpower. [And that only lasts as long as we have the money to support our very expensive military! When the dollar is worth nothing, our military won’t be worth anything either.]

Do not expect this to be a straightforward default. The US money center banks are wielding weapons of financial mass destruction, and are not afraid of gooning it up in the markets for real products, as they still exercise significant pricing power. [Kind of amazing really but that ‘pricing power’ is shrinking by the minute as the dollar spirals to its death because there’s nothing but ‘air’ behind it…and its not even hot!]

”It may be our currency, but it's your problem.'' John Connolly, Treasury Secretary, in response to European anger at the 1971 US gold default.

So, it will take time for the exporting nations to grow their domestic markets, and to find new customers at home and abroad. It will take time for the nations to agree on a new currency regime, as the US has now pulled the rug out from under them once again with the quantitative easing of the dollar. But that adjustment effort is now well underway. With regard to change, "It is not necessary to change. Your survival is not mandatory." - W. Edwards Deming [Again it is ‘assumed’ that the huge swath of humanity that has found itself suddenly priced out of existence will quietly kill themselves rather than embark on a rampage that will destroy everything in their path! These fools ‘rouse the giant’ at their own peril!]

The downside of structural change after a long decline is that once it occurs, it is difficult to obtain one's prior reputation and position. [It’s even harder to do once you’re dead…]

"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." [Um, this could be Billy-boy talking his book again but I tend to doubt it…]

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."

Porter Stansberry, The bankruptcy of the United States is now certain

Posted by Jesse at 10:56 AM

At the end of the day there’s a certain ‘poetic justice’ to the idea that ‘speculative investors’ will drive this nation, which was founded by their fathers, into the ground.

If I don’t miss my guess, these ‘speculators’ will be branded as criminals, tried and executed for crimes against humanity…because in the end, it’s not about competition at all, it’s about caring for society…all of society.

Thanks for letting me inside your head,


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