Is this the year that the USA will default? --> China worried about US debt

[italiandragon]

Please: if you reply, don`t turn this thread into a politic war as I`m not interested in politics but in finance!

Thanks!
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DECEMBER 30, 2009

Coming Soon: The Bill for the Massive U.S. Debt

BY DON MILLER, Associate Editor, Money Morning

Americans could be in for a rude awakening in coming months when they discover the true scope of the massive national debt racked up by the U.S. government.

In fact, the $1.6 trillion deficit expected for 2010, which is above 10% of gross domestic product (GDP), is only the beginning.

Since the current economic crisis began in late 2007, the U.S. Federal Reserve has tripled the size of its balance sheet, creating enormous amounts of new money by lending to hundreds of ailing banks and buying up more than $1 trillion of questionable asset-backed securities.

But that's only a small part of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion, including underwriting the entire system of mortgage finance in the United States, a system that currently shows a nearly $1 trillion loss.

And none of these figures include any of U.S. President Barack Obama's stimulus packages, which means the actual deficit next year might grow to $2 trillion - around 15% of GDP.

"What a good country or a good squirrel should be doing is stashing away nuts for the winter," William H. Gross, managing director of the giant bond-management firm Pimco Group, told The New York Times. "The United States is not only not saving nuts, it's eating the ones left over from the last winter."

The ramifications of this debt, which is bound to grow larger, will have a profound effect on investors - not the least of which is the imminent decline of the dollar.

The Spiraling National Debt

Right now, without counting future unfunded liabilities like Social Security or Medicare, our national debt tops $12 trillion. There are roughly 100 million American households. That's a national debt of roughly $120,000 per family.

In order to keep the government functioning, Congress just increased the federal debt ceiling to $12.5 trillion. And the party isn't over yet.

In an effort to keep mortgage interest rates low, the Fed pledged this month to buy yet another $500 billion of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) guaranteed mortgage securities.

But all that spending has a price. And the bill is about to come due.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the U.S. Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36% of the government's marketable debt - about $1.6 trillion will mature in the next 12 months.

That leaves the government in the same undesirable position as a lot of people who took out adjustable rate mortgages (ARMs) - forced to refinance short-term debt at higher interest rates for the long term.

"The government is on teaser rates," Robert Bixby, executive director of The Concord Coalition, a nonpartisan group that advocates lower deficits, told The Times. "We're taking out a huge mortgage right now, but we won't feel the pain until later."

The United States will spend almost $400 billion on interest to service our existing national debt. Currently, the United States takes in roughly $2 trillion in taxes, half of which come from income taxes. So the interest on our debt is already consuming 20% of all tax receipts, or 40% of all income taxes.

The White House estimates that the government's tab for servicing the debt will exceed $700 billion a year in 2019, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

To amplify that figure, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan, according to The Times.

Then, there's the cost of the health insurance legislation and the potential cost required to reform Social Security and Medicare.

As noted last week in Money Morning's Martin Hutchinson , the healthcare bill alone will significantly increase federal healthcare spending by about $185 billion in 2019, according to the Congressional Budget Office (CBO).

It will also involve about a $100 billion increase in taxes by in 2019, the CBO said. And even though the bill relies on slashing Medicare growth for funding, "it is unclear whether such a reduction in the (Medicare) growth rate could be achieved."

And who knows how much the bill could really cost.

"No one (in Congress) can explain to me what's in the bill, and for Congress to vote on a bill that they don't understand whatsoever, you got to question...what kind of government we have," New York Mayor Michael Bloomberg told The Huffington Post.

Americans have now doubled down on debt. The government's debt has almost doubled in the last two years alone, as Americans' personal wealth sank along with housing and stock prices.

So where will the money come from? Total domestic savings in the United States are only around $600 billion annually. 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.

All this debt might not constitute a crisis if the United States were still financing its own debt. But the United States has been a net debtor to the world since 1985. And today, foreigners own 44% of all the country's short-term debt, or about $880 billion.

Since the expansion of the Fed's balance sheet got started in earnest last fall, the value of the dollar has fallen about 15%. The faster the money supply grows, the more likely the value of the dollar will continue to fall.

It seems highly unlikely the level of deficit spending can continue without sparking a run on the dollar as foreign governments begin to sell U.S. Treasury bonds. The only real question is at what point U.S. creditors will finally decide they can't finance any more of the nation's deficit spending because it's simply not worth the risk.

China has routinely called on the United States to rein in its soaring budget deficit and spare the dollar any further losses.

"We have lent a huge amount of money to the United States," Chinese Premier Wen Jiabao said earlier this year. "Of course we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried. I request the United States to maintain its good credit, to honor its promises and to guarantee the safety of China's assets."

As an alternative to U.S. debt China has already begun the process of diversifying its reserve holdings away from the dollar. And China isn't alone, other emerging markets are going the same route.

"It's time to sell U.S. Treasuries," Kim Heeseok, the head of investments for South Korea's government pension service, recently told Bloomberg News,

Similarly, to protect their nest eggs, investors will have to be very good at managing their assets. Fortunately, there are several ways for investors to protect themselves

Goldman Sachs Group Inc.'s (NYSE: GS) London economic team recommends going long the "BRIC" markets of Brazil, Russia, India and China, while going short equity indexes of the G-7 nations, including the United States.

Investors could also turn to commodities, such as gold and silver, which stand to gain in value as the dollar weakens.

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and this one comes from a Canadian site:

http://www.edmontonjournal.com/healt...985/story.html


Troubled U.S. economy out of ideas, out of mojo, out of gas


BY GARY LAMPHIER, EDMONTON JOURNAL

DECEMBER 31, 2009


The decade with no name finally has one: The Big Zero.

That's what New York Times columnist Paul Krugman dubs the past 10 years, and in my books, his label is an apt one. For Americans, at least, the decade was a giant doughnut. As in: zero job growth, zero stock market gains, zero income growth, and zero upside for homeowners.

Here in Canada, we fared much better. Average house prices doubled over the past decade, and the Toronto Stock Exchange's lead index is about 40 per cent higher than it was on Jan. 1, 2000, thanks to our abundance of resource stocks.

In Alberta, the oilsands exploded, driving economic growth, income growth, and net wealth.

Globally, there was also good news. Countries like China, India, Brazil and Russia boomed, lifting millions out of poverty, and creating a new class of wealthy citizens. That's worth applauding.

South of the border, however, it's hard to find much to cheer about. Oh, there were some ups as well as downs. Before the housing market tanked, U.S. stock market indexes hit record highs in 2007.

But on a point-to-point basis, the U.S. economy has gone nowhere since Y2K dawned. The tech boom cratered, the housing bubble was built on fake money, and the grossly overhyped dot.comera largely lost its fizz (OK, so now we Tweet and spill our lives on Facebook -- how revolutionary).

Corporate heavies like Enron and WorldCom went kablooey, two of Detroit's Big Three carmakers got flattened, and big banks like Lehman Brothers collapsed under the weight of their own crappy assets.

A decade ago, America's federal debt was less than $5.8 trillion US. Today it's $12.1 trillion, and rising so fast Congress was just forced to hike the debt ceiling for the umpteenth time. It won't be the last.

Total U.S. government debt is sure to reach 100 per cent of GDP in the next 18 months. After that, who knows. No one really wants to think about it, especially the talking heads on financial TV shows.

Besides, it's already worse than the official numbers show. For starters, the U.S. refuses to consolidate the debt of 100-per-cent owned mega-disasters like Fannie Mae and Freddie Mac on its national accounts. Oh well. Never mind.

Perhaps we'll have a U.S. dollar crisis, as many fear. With two wars to fight, millions out of work, a quarter of all home mortgages under water, and no clear plan to get out of this mess -- other than a geyser of public cash or debt guarantees, now at $11 trillion and counting -- it's hard to see a happy ending.

Quite simply, the U.S. has lost its mojo. It's not just broke. It's bankrupt of ideas.

The nation that gave us inventive geniuses like Henry Ford and Thomas Edison is now in the casino biz. With Wall Street's help, the Fed inflates speculative bubbles to buy time and paper over its messes.

The huge stock market rally that began last March is built on one thing: cheap money. I'm sorry I missed it, of course. I could have used the dough. But when it ends, as it inevitably will, it won't be pretty.

Meanwhile, America's once-vaunted innovation machine has gone missing in action. R&D budgets have shrunk, vencap funds have gotten gun shy, and U.S. factories stopped making stuff the world wanted (and could afford) long ago, ceding their turf to China.

The eggheads said don't worry, the value-added product-design jobs will remain in America. Which is a nice concept, but lousy math. Most of the 15 million Americans who are jobless or underemployed don't have PhDs in chemical engineering. They're worker bees, ill-equipped to design new computer chips or wonder drugs.

Throughout the recession, offshoring by U.S. companies to places like India and the Philippines actually increased, not decreased. And the big brains still wonder why job losses were so deep over the last year. Perhaps they should visit Detroit.

The city that once symbolized U.S. industrial might is now talking about turning its thousands of vacant lots or derelict homes into a giant urban farm.

That's a good start, I figure. Carrots and tomatoes have more intrinsic value than much of the garbage Wall Street's "innovators" produced in recent years.

In retrospect, most economists mistook Wall Street's dubious -- even fraudulent -- paper shuffling for economic growth. In fact, it was all a giant con.

Even the major U.S. business publications -- hardly a hotbed of left-wing radicalism -- agree that Wall Street is largely to blame for the economic implosion.

The kicker? It doesn't matter who sits in the White House, it seems. Like the Republicans, the Obama crew hasn't done a thing to address Wall Street's excesses, beyond mouthing a few a few vacuous sound bites about "fat cat" bankers.

There's no serious talk about breaking up "too big to fail" banks like Goldman Sachs, and all the yapping about executive bonuses is mostly for show. In the wake of the economic collapse, Wall Street parties on, while millions of working stiffs now rely on food stamps to buy groceries.

Bank profits and bonuses are soaring, thanks to taxpayer-funded bailouts, access to zero-interest funds from the Fed, and such wonders as high-frequency computer trading, which enables banks like Goldman to shove retail investors to the back of the queue. That's not capitalism, or the free market. That's a market that's rigged, for the benefit of the few, at the expense of the many.

In moral terms, or democratic terms, it's easy to see what all this amounts to: a big fat zero.

glamphier@thejournal.canwest.com

© Copyright (c) The Edmonton Journal

[south]

Sorry, I see no way this can't turn into a political discussion. That said however, no, the U.S. will not default this year though. Instead, our wonderful government will meekly accept a new global currency, brought on by the spending policies of this and the previous administration, along with all the implications therein (many).

[INVIGOR]

...

[italiandragon]

Sorry, I see no way this can't turn into a political discussion. That said however, no, the U.S. will not default this year though. Instead, our wonderful government will meekly accept a new global currency, brought on by the spending policies of this and the previous administration, along with all the implications therein (many).

which new global currency?

If they start selling Us debt from China, you`d be broken beyond any worst nightmare...

The good thing is that domain registrations will become cents on the Aussie dollar

[Creature]

[QUOTE=italiandragon;1840790]which new global currency?

Only one isn't there, gonna call it the Oro aren't they?: http://www.futureworldcurrency.com/

[Acro]

China has amassed a huge number of US dollars - that's their only concern. They play the game well against the US and the current state of the economy makes them nervous.

[italiandragon]

[QUOTE=Creature;1840826]

which new global currency?

Only one isn't there, gonna call it the Oro aren't they?: http://www.futureworldcurrency.com/

Oro? Si certo!

Do you really think that the finance world is going to let it go a big cake of 3 TRILLION dollars a day market? (aka Forex)

It`s not going to happen in the near future (aka next 20 years at the very least!)

Tips: Gold May Hit $1,375, Dollar Going Down

Published: Tuesday, 5 Jan 2010 | 5:14 AM E

By: CNBC.com

The price of gold saw strong gains during most of 2009, fueled in part by weakness in the dollar. That trend reversed slightly in the last few weeks of the year, sending the price of the precious metal lower.

But one market expert told CNBC that gold may push higher in 2010, while another said that the dollar's declines could also return.

Gold Prices May Hit $1,375 in 2010

Spot gold prices could hit $1,375 in 2010, predicts John Licata, chief investment strategist at Blue Phoenix.

"I think there're plenty of catalysts that have not been talked about related to gold," Licata said.

The fear of sovereign debt default could continue to drive investors into gold, according to Licata. And California's budget deficit could well join the likes of Greece and Ireland on the watch list for default, he added.

Licata also pointed out that the November Congressional elections could be another potential catalyst for an increase in the gold price if the Republican Party gains more seats.

[stewie]

China has many reasons to keep the American economy alive... so I doubt they would do anything to bust it. Its in both parties interest to work with it as best they can. Im sure some back door deals will come out of this, but whats new...LOL

China has been dealing its way into America for years.

JMO

[italiandragon]

China has many reasons to keep the American economy alive... so I doubt they would do anything to bust it. Its in both parties interest to work with it as best they can. Im sure some back door deals will come out of this, but whats new...LOL

China has been dealing its way into America for years.

JMO

have you noticed how farmers take care of their pigs before eating them?

They feed them, feed them, feed them....then...

[draggar]

China has many reasons to keep the American economy alive... so I doubt they would do anything to bust it. Its in both parties interest to work with it as best they can. Im sure some back door deals will come out of this, but whats new...LOL

China has been dealing its way into America for years.

JMO

Yep, did we all forget the large pet food scare a few years ago? Where did the tainted gluten come from? China.

Where do many of our inexpensive (cheap) "stuff" come from that we buy at Walmart? China.

Where do we get a lot of our frozen seafood (primarily shrimp?), Malaysia, Indonesia, Vietnam, and China.

China's economy is directly affected by ours - they ship out goods to us like you wouldn't believe.

[italiandragon]

Yep, did we all forget the large pet food scare a few years ago? Where did the tainted gluten come from? China.

Where do many of our inexpensive (cheap) "stuff" come from that we buy at Walmart? China.

Where do we get a lot of our frozen seafood (primarily shrimp?), Malaysia, Indonesia, Vietnam, and China.

China's economy is directly affected by ours - they ship out goods to us like you wouldn't believe.

They ship it everywhere, when I first arrived in Australia I was both surprised and disgusted to see that the frozen fish sold in the main supermarkets was not beautiful Australian product but most from Vietnam! Indeed few months later on the news they were inquiring about all the poison and contamination of such fish.

Anyway Vietnam or Malaysia is not China.

And China can simply buyout the US if things keeps going this way.

I can see a red flag with stripes...

[south]

I think you mean "the previous administrationS" with an emphasis on the "S"

Correct. Been selling us down the river for quite some time.