Thursday, June 25, 2009

The Threat That Could Bring Down the US

Moody’s has issued a renewal of the US Treasury’s AAA credit rating. Their assessment is based heavily on the notion that the rest of the world can’t get off the dollar and that the US can continue to increase it’s debt to GDP ratio as long as the cost of borrowing stays low.

Some unpleasant facts: the debt to GDP ratio will go from 40 to 60 percent this year and the Fed has been keeping interest rates (the cost of borrowing) down by purchasing huge blocks of government debt. It pays for these purchases with government borrowing.

Moody’s issued this report in Japan where they are the second largest holder of US debt as well as the holder of trillions of US business assets. The fact that the Full Faith and Credit of the United States of America has to be discussed in the same manner as the credit worthiness of a company like GM or Chrysler should be a red flag. And pinning the hopes and dreams of Americans on the idea that the rest of the world will keep propping us up no matter what because they can’t figure out how to live without us, is absurd.

We are providing less and less of what the world needs and wants everyday. We don’t export anything and they really don’t want more Dollars, China just unloaded 8 billions of its Dollar reserves to buy another oil company and they are doing this at every opportunity. At some point, one of these big ticket sales will fail to go through because they won’t take Dollars and then nobody will want them. As it is Chinese exporters prefer to be paid in anything but Dollars. China now has over half of its foreign currency reserves in non-dollars and has acquired over 100 tons of gold.

We no longer need to worry about terrorists or who has nukes, we need to worry about being ignored.