Tag Archives: sovereign default

Why The US Is Doomed, And The Debt Ceiling “Crisis” Is Irrelevant

1 Aug

One chart from the New York Times explains why it no longer matters what US politicians decide to do about raising their debt ceiling even higher:

Exponential rise = unsustainable bubble.

Whether now, or later, the US economy is doomed.

Guest Post – Our Government Debt Crisis Is Already Here

21 Jun

Submitted by reader JMD.
A follow up to “Why The RBA Sold Our Gold

In my previous article I expressed the view that the RBA gold sales in 1997 were to extinguish a portion of the large amount of Australian government debt outstanding at the time of the Asian Financial Crisis.

The government was forced to extinguish debt rather than roll it over – (ie) issue new debt – or suffer significant devaluation of the Australian dollar, a ‘sovereign debt crisis’ if you will, as occurred in several nations to our north at the time.

Graph 1. shows how the central bank moves the interbank rate with the growth, or lack thereof, Broad Money, the broadest measure of financial system credit. A falling trend in Broad Money is generally equivalent to widening credit spreads, a falling (or flailing) stockmarket, higher government bond prices, bankruptcies…. in other words, a debt crisis or economic recession.

Click to enlarge

As credit spreads widen the central bank lowers its ‘target’ rate in an attempt to bring rates down across the spectrum, from junk to ‘AA’ bank debt. Government debt of longer duration is moving along with the shorter term debt. I’m speculating here but the long term trend in the 10yr yield may be an arbitrage or ‘risk free’ profit for those borrowing short & lending long. In keeping short term rates low, central banks provide all the ‘liquidity’ the financial system requires and this ‘liquidity’ is used to ‘bid up’ longer term debt, thus long term yields are generally falling in tandem with short term yields. The ‘profit’ is the spread between short and long term yields.

Graph 2. is the monthly issuance of Treasury notes1 and bonds, to show the response of government to debt crises. If you read my previous article you know the end result of government responses and I am gobsmacked at the current level of debt outstanding, it’s not as if it is any more likely to be repaid than in 1997.

Click to enlarge

One thing to note is the 10yr yield around the time of the Asian Financial Crisis in 1997. There is nothing that would indicate problems in the government bond market, in fact just the opposite, the 10yr yield was more or less falling throughout that period.

I think that those looking for a rise in interest rates to signify the beginning of a crisis are looking in the wrong direction. The crisis is already here, has been for some time & is reflected in the price of the only extinguisher, thus arbiter, of all (including if not especially, government) debt……gold.

Note: 1. Data for Treasury note issuance is not available pre June 1989.

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

2012 U.S. Presidential Candidate Ron Paul Agrees: Barnaby Was Right

10 Jun

U.S. Republican Congressman Ron Paul, the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy, who is again running for President in 2012, confirms that the USA is already defaulting on its debts.

From Think Progress, 6 June 2011:

Paul, who is running for President, claimed we are already in default but that the government was mitigating the effects through inflation.

KEYES: Congressman, there’s been a lot of heated rhetoric about this upcoming debt ceiling fight. Do you think it’s really going to be that bad if a default were to happen come August 2nd?

PAUL: Well, they’re not going to let it happen. They’re going to do it. But I try to tell people, a default is already occurring, it’s just how they do it. Governments always default, but most of the time, they don’t quit paying their bills because they’ll just print the money. They default by giving you money back that doesn’t have as much value and that’s when prices go up. So that’s how they’re defaulting and since there’s inflation back and hurting us, there’s plenty of default going on right now.

Barnaby was ridiculed up hill and down dale in late 2009 / early 2010, for daring to forewarn of the risk that the USA “could” default on its debts. He even lost his job as Shadow Finance spokesman, thanks to the flack he received from smart-arse, all-knowing and all-wise “experts” on all sides.

Not one of whom had the simple commonsense to see and predict the onrushing GFC.

Even I – a humble small businessman, and lowly blogger – was able to see that coming easily. Backed my intuition and commonsense, and put all my super into cash in May 2007, in defiance of “expert” financial advice.  And completely avoided any losses in the global sharemarket crash:

If even I could see that coming, then why – after millions of Aussies lost billions in the GFC – why do we continue to bend our knees and doff our caps to the very same so-called “experts” in the Treasury department, the Reserve Bank, and the financial media, who all completely and utterly failed us?  And, massively overpay them for crappy / wrong / non-existent “advice”?

Barnaby foresaw the risk of a coming US debt default back in late 2009, and had the courage to warn that Australia should have a “contingency plan”.

Now, a highly respected longstanding US congressman and 2012 Presidential candidate has outright conceded the truth … that Barnaby was right.

Perhaps some Australians might now think to heed Barnaby’s most recent warning.

Both of our major political parties are planning to steal our super to pay down ever-rising debts.

Just like the USA, France, Ireland, Poland, and many more have done, and are doing right now.

How Much More Debt Next Week, Wayne?

4 Jun

$2.5 Billion.

Great, isn’t it.

Over the past 6 weeks since I began tracking the AOFM’s government debt auctions, Wayne’s pack of lunatics have borrowed no less than $2 Billion, and as much as $2.75 Billion.

Every single week.

And we can see here, that ever since JuLIAR Gillard knifed KRudd, she has been on a borrow-and-spendathon that puts even the jet-setting Mr Stimulus to shame.

The following chart shows only the value of Treasury Notes auctioned by Labor. These are “short term” debt “instruments”, that typically must be repaid within 30-90 days.  They are supposed to be issued only when necessary to “smooth” cashflow requirements of the government.

Most of the government’s primary funding comes, instead, from the auction of Treasury Bonds, which are longer term debt “instruments”, that must be repaid over durations of anything up to 20+ years.

We take particular interest in the blowout in borrowing using Treasury Notes, because it indicates a government that has completely lost the plot.  An utterly incompetent government, that has no idea what it is doing.  Has no planning.  Cannot even manage to balance the weekly cashflow needs of government.  And so is constantly going back to the international debt markets, to borrow $2+ billion per week on the “short term” national credit card (click to enlarge):

Source: Australian Office of Financial Management (AOFM) - to end April 2011

Note carefully that this chart only goes up to end of April this year. During May, the government borrowed another $5.8 Billion using Treasury Notes. To picture this – since I’m too lazy to update the chart right now – just imagine another blue line on the end of that chart, one that is double the height of the tallest blue line.

So far in June – a mere 3 days in – they have already borrowed another $500 million using T-Notes.

And next Thursday 9th June, they will borrow another $1 Billion using T-Notes.

Wall Street ‘Vastly Underestimating’ Risk Of US Debt Default

1 Jun

From Forbes magazine’s Robert Lenzner in StreetTalk:

“I was up in Wall Street  this week,” (renowned NY Times columnist) Brooks said. “They’re vastly underestimating the source of political risk here. We could have a major problem, I think, either this summer or the next couple years. And I’d be worried about investing too much in the market. That’s my financial advice.”

And Lenzner’s take on this?

I have to admit Brooks woke me up. I had blithely been assuming a deal to raise the debt limit would get resolved at the last minute–the classic American way…

It’s a future scenario few of us want to contemplate. A runup to possible default will not be positive for the stock market. Even if default is avoided then the notion that Wall Street doesn’t get the crisis means there’s too much denial of reality in stock prices. I’m with David Brooks.

We can now add Forbes’ Robert Lenzner and the New York Times’ David Brooks to “foreign powers”, Wells Fargo senior economist Mark Vitner , CDS traders and investors, Ronald Reagan’s budget director David Stockman, the Wall Street Journal, the U.S. Treasury, Southern Cross Equities’ Charlie Aitken, ANZ chief Mike Smith, global currency expert Savvas Savouri, ABC’s Inside Business and Business Spectator Alan Kohler, credit rating agency Standard & Poors, CNBC, Deutsche Bank, and Barack Obama.

All agree that Barnaby was right when he forewarned of the risk of US debt default back in 2009 (“Barnaby Warns of Bigger GFC“).

Apologies please, Messr’s Swan, Tanner, Henry, Stevens, and assorted mainstream media “experts”. You were all wrong.

Wall Street Journal: “What If The U.S. Treasury Defaults?”

15 May

The Wall Street Journal joins the chorus:

A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we’re behaving,” says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros…

The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.

The U.S. Treasury will hit that $14.3 Trillion debt ceiling on Monday.

And says that the U.S. only has until August 2nd to find a way to avoid default.

All together now …

Barnaby Was Right!

US Treasury: August 2 Deadline To Avoid Debt Default

14 May

This Monday, the US government will hit its $14.3 Trillion debt ceiling.  By August 2nd, it could default on its mindboggling debts. So says the US Treasury (below).

Remember when Barnaby was widely ridiculed for warning that the US could default on its debts, and for suggesting that Australia needed a contingency plan?

He lost his new job as Opposition Finance spokesman as a result.

October 2009 (emphasis added):

The Nationals Senate leader Barnaby Joyce is openly canvassing an economic upheaval that would dwarf the current global financial crisis, triggered by the US defaulting on its sovereign debt within the next few years.

In unusually pessimistic comments for a senior political figure, Senator Joyce said the US Government was running such large deficits and building up so much debt that it was in a similar position to Iceland or Germany before World War II.

… Senator Joyce insisted yesterday that the dangers to the global economy from the run-up in US private and public sector debt were real and should be debated.

“It is the elephant in the room,” Senator Joyce said.  “This is a huge risk that Australia faces. What is the game plan, what happens if it comes unstuck?”

December 2009 (emphasis added):

The opposition finance spokesman, Barnaby Joyce, believes the United States government could default on its debt, triggering an “economic Armageddon” which will make the recent global financial crisis pale into insignificance.

Senator Joyce told the Herald yesterday he did not mean to alarm the public but there needed to be a debate about Australia’s “contingency plan” for a sovereign debt default by the US or even by a local state government.

“A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that,” Senator Joyce said.

His warning came as the Rudd Government ramped up its attack on Senator Joyce as an economic extremist…

Senator Joyce said the chances of a US debt default were distant but real and politicians were not doing the electorate a favour by refusing to acknowledge the risk.




From the New York Times, May 9, 2011 (emphasis added):

Speaker John A. Boehner said Monday that Republicans would insist on trillions of dollars in federal spending cuts in exchange for their support of an increase in the federal debt limit sought by the Obama administration to prevent a government default later this year

[Senate leader] Mr. Schumer and Roger C. Altman, an investment banker and former Clinton administration Treasury official, said the consequences for the nation’s economy could be dire if the government defaulted for the first time in its history or if the debt-ceiling talks were pushed to the brink.

If America were to default, even for 24 hours, that would have an unprecedented and a catastrophic impact on global financial markets and on American markets,” Mr. Altman said.

From Reuters yesterday, May 13 2011 (emphasis added):

The United States is set to reach its $14.3 trillion debt limit on Monday, and will only be able to avoid default until Aug. 2, according to the U.S. Treasury. Efforts to forge a bipartisan deficit-reduction package as a step towards Congress raising the borrowing limit are in turmoil.

A thicket of plans to cut the deficit, which is expected to hit $1.4 trillion this year, have emerged in recent days with virtually no chance of passage in Congress.

The US Treasury now joins Southern Cross Equities’ Charlie Aitken, ANZ chief Mike Smith, global currency expert Savvas Savouri, ABC’s Inside Business and Business Spectator Alan Kohler, credit rating agency Standard & Poors, CNBC, Deutsche Bank, and Barack Obama, in conceding that Barnaby Was Right.

Does Labor have a contingency plan for a US debt default?


They don’t even have a plan on how to achieve a single year of budget surplus.  Instead, they are increasing Australia’s debt ceiling by another $50 Billion to $250 Billion.

And counting their budget chickens way before they’re hatched.

The “surplus” that Labor are proudly talking about as though it is fact, is nothing more than a “forecast”.  One based on Labor “estimates” of years of continuous record-high minerals prices and record-high terms of trade … in other words, on a never-ending China boom.  Even the Americans are laughing at them!

This not going to end well.

Barnaby is right.


Add American centrist think tank Third Way to the growing list.  They will release a study on Monday regarding the likely impacts of a US default.

From Reuters again:

The Treasury Department is expected to hit its $14.3 trillion borrowing limit on Monday, making it unable to access the bond markets again.

The Treasury Department says it can stave off default until August 2 by drawing on other pots of money to pay its bills.

Treasury officials have warned of “catastrophic” consequences if Congress does not approve a further debt-ceiling increase by then, but have declined to say exactly what would happen.

The Third Way report, based on a survey of existing economic research, spells out the details…

Defaulting on our debt is not an abstract idea that might affect a few institutions on Wall Street; it would harm tens of millions of Americans in profound and lasting ways,” the report says.

Swan Raises Govt Borrowing Limit By Another $50bn – And Don’t Ask Questions

12 May

But but but … we’ll have a surplus budget in 2013. Honest we will:

The Government has blamed Australia’s summer of disasters for its move to raise the cap on government debt by $50 billion.

As Treasurer Wayne Swan was congratulated by colleagues after Tuesday’s budget speech, Assistant Treasurer Bill Shorten introduced draft laws allowing the government to increase the amount it can borrow from $200 billion to $250 billion.

And what’s more:

The proposed legislation would also remove a requirement that the Treasurer explain why the extra money is needed.

Barnaby is right.

Leading Australian Stock-Picker: Barnaby Was Right

11 May

Southern Cross Equities’ Charlie Aitken tells his clients to get out of the stockmarket and into cash:

Aitken says anyone looking closely at the markets at the moment has to entertain the possibility of something they have not seen before. “[Nationals senator] Barnaby Joyce was ridiculed last year for saying this, but I’m prepared to say that some sort of US debt default is now on the table as a risk for investors. I never thought I would say that. You would have to say that is the biggest black swan of them all.”

The term black swan refers to a completely unexpected, utterly improbable event. In the investment market sense, a black swan is a scary prospect, with its connotations of a sudden market fall. The origin of the term is in the astonishment of the Dutch explorers who arrived at the Swan River in the 17th century and discovered that swans could be black, when to all European experience they were only white.

Aitken joins ANZ chief Mike Smith, Toscafund’s global currency expert Savvas Savouri, ABC’s Inside Business and Business Spectator‘s Alan Kohler, credit rating agency Standard and Poors, CNBC TV “First in business worldwide”, Deutsche Bank, and Barack Obama, in conceding that Barnaby Was Right about the risk of US debt default.

Barnaby forewarned of the dangers to the global economy – and Australia – back in late 2009 through early 2010.

The “experts” are slowly, and finally catching up with the only politician in the country who is always on the ball.

More from Charlie Aitken – and independent derivatives expert Satyajit Das – in this must-read article.

US$ To Hit A$0.58 – Currency Experts Agree, Barnaby Was Right

9 May

More experts line up with Alan KohlerStandard & Poors, CNBC, Deutsche Bank, and Barack Obama, in agreeing that Barnaby was right.

First, the head of ANZ:

ANZ chief Mike Smith said yesterday that the currency was likely to resume its climb above $US1.10, and one of the world’s leading foreign exchange experts predicted the dollar would continue to rise and could hit $US1.30 in 2013 and $US1.70 by 2014.

This spells bad news for non-resource sectors such as manufacturing and tourism…

“I can’t see that there is anything to knock it off its perch because it’s not only the strong Australian dollar, it’s also the weak US dollar,” Mr Smith said yesterday.

“And when you think about what is happening in the US, I can’t see them increasing rates for at least 18 months and that will have an impact.”

Next, a global currency expert:

Global currency expert Savvas Savouri, of the British-based Toscafund hedge fund, went a step further, predicting the greenback would be relegated to a “museum” …

Dr Savouri, in Sydney for a conference, predicts the dollar will reach $US1.30 by 2013 – and $US1.70 by 2014, as the greenback relinquishes its “exorbitant privilege” as the world’s default currency.

What the ‘experts’ aren’t telling you, is that the reason for the Aussie dollar’s rise is directly due to the slow-motion collapse of the US economy, and the unintended consequences caused by those trying to prop it up.

How’s that, you ask?

For several years, the US Federal Reserve has been creating literally trillions of US dollars out of thin air (“Quantitative Easing” 1 and 2).  By doing this, it believes it will achieve two things – (1) Keep interest rates in America extremely low (near zero), preventing further collapse in the housing market and broader economy; (2) pump up the stock market, creating public “confidence”. And it has achieved both those aims.

But what about the unintended consequences?

First, the immediate effect of printing money is to weaken the American currency.  That is the main reason why the Aussie dollar has risen against the USD.

It is not because our currency has strengthened.  It’s because the USD has been (deliberately) weakened.

Much of those trillions in near interest-free US money has been poured into speculation by international banks and hedge funds.  What are they speculating on?

Mostly on commodities – which our economy sells.

Hundreds of billions in “hot money” has been flowing from the Zero-Interest-Rate-Policy (ZIRP) United States into our currency, through speculation on our commodities.  Driving  up our currency’s apparent strength.

But “hot money” can flow out again just as fast.  As we saw in the GFC.  And again just last week, when the Aussie dollar hit US$1.10, and plummeted to US$1.05 in three days … due to a single bad economic news data release in the US:

Yahoo Finance - AUD/USD 1.10 to 1.05

During the peak of GFC panic in Sep-Oct 2008, the Aussie dollar collapsed from US$0.98 to just US$0.60 in barely two months:

Yahoo Finance - AUD/USD

When you compare the Aussie dollar to the Euro, for example, it’s easy to see that our dollar only “appears” to be super strong when it is being compared – as usual – only to the ever-weakening USD.

Our dollar has risen against the Euro too. But by far less. And again, only after first falling significantly in the GFC.  Then rising only after the US Federal Reserve began seriously printing money, which has been poured into commodities and commodity currencies:

Yahoo Finance - AUD/EUR

Australia is a little cork floating on the ocean of other nations’ economic decisions.

As Barnaby forewarned in late 2009 / early 2010, the US is effectively defaulting on its debt right now.

By stealth.

Destroying the value of your currency by money printing, has always been the most common way in which nations have defaulted on their debts.

Barnaby was right.

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