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Thread: USA in danger of losing AAA credit rating ...

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    Default USA in danger of losing AAA credit rating ...

    (snip)"The United States may be on course to lose its 'AAA' rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.

    "The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system" and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

    "In the United States there is already a funding crisis, and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off," Hennecke told CNBC.

    In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world."(snip)

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    Default Re: USA in danger of losing AAA credit rating ...

    could this be the reason why our foreign creditors may be reducing their exposure to US Treasury bonds?

    http://www.plata.com.mx/mplata/artic...iidarticulo=89

    "As of August 2008 International Reserves were growing at the explosive annual rate of 26.5%. Suddenly, since August, Reserves have stopped growing.

    In August, they were just under $7 trillion expressed in dollars, though “paper” Reserves are made up not only of dollars, but also euros, British pounds, Japanese Yen and a smaller quantity of some other currencies.

    It seems to me that when a huge number such as $7 trillion suddenly stops growing, it must indicate that something very serious is going on. The growth of Reserves was so severe it was really an explosion; quite abruptly, it has stalled and has actually turned negative.

    One explanation might be that since the figure is given in dollars, and the values of the other currencies which make up Reserves have been falling with regard to the dollar (except for the yen), that the contraction in the value of euro and pound Reserves caused the amount of Reserves to begin contracting.

    Still, the huge rate of growth of Reserves, year-on-year, was up to 26.5%, and it seems to me that this previous explanation is not sufficient to account for a sudden halt in growth and the onset of a decrease in Reserves.

    I have not seen a single article dealing with this important change; I comb the Internet daily and I have found not one comment on this development.

    The International Reserves were growing by leaps and bounds, as a consequence of the “Imbalances in International Trade”, where the countries which were issuing currencies accepted as Reserves were exporting huge amounts of their currencies in “payment” of their trade deficits. These currencies were then re-invested by the exporting countries in bonds and agency debt. The main actor was the US, which was able to fund its enormous fiscal deficits through the sale of these bonds and agency debts. It was a nice deal while it lasted for the US and, I suppose, for the Brits as well as the Europeans.

    Now, if the Reserves are no longer growing but diminishing, this might indicate that the exporting countries are no longer buying and accumulating more US, British and European debt. If they are not accumulating more foreign currency bonds and debt, then the fiscal deficits of the US, the Brits and the European Union countries are no longer being funded – especially important to the US, which is running an immense fiscal deficit, what with the US Treasury going into debt like a drunken sailor on account of the need to bail-out all and sundry debtors.

    Now if the US deficit is not being funded, then that means that the fiscal deficit is simply being monetized by the Fed. Or what else can it mean?

    The US is on track to incur a fiscal deficit of $1 Trillion, perhaps much more, in this fiscal year. If the International Reserves are not growing, that means it will be impossible to fund that deficit. That would mean: monetary inflation in spades, in the US. "

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    Default Re: USA in danger of losing AAA credit rating ...

    The "beauty" of having the control over issue of the world reserve currency is that the US cannot technically default on it's dollar denominated Treasury bonds since we can just turn on the printing press. The issue of insolvency will arise when we are be forced to borrow in foreign currencies...

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    Default Re: USA in danger of losing AAA credit rating ...

    ^^^ two comments ...

    - the upcoming G20 meeting is undoubtedly meant to address the fact that the US business and consumer 'depression' has vastly reduced the outflow of US dollars to foreign suppliers ... with the worst 'hits' being taken by China, the Saudis, and to some extent the Japanese and Western Europeans. The trade balance not only includes goods and commodity purchases from foreign sources paid for in US dollars, but it also includes (very non-transparent) 'carry trade' cash flows where money previously borrowed in foreign currencies and invested in US markets are now reversing (i.e. the US investments are being liquidated and the foreign currency loans being repaid with the US dollar proceeds of the sales)

    The new bailout programs are indeed worsening the US budget deficit, as are falling tax revenues and growing unemployment / social welfare benefit costs. But the brunt of the US gov'ts need to fund these measures will actually occur in the second quarter of 2009. Part of the reason for this is that even though US stock markets and commodity prices have declined there are still a lot of tax revenues being generated right now via the (forced) sales of profitable assets by mutual funds, by hedge funds etc. which have been necessary to meet withdrawl requests. This will stop as the withdrawls stop and/or the hedge funds go broke. Once these 'one shot' tax revenues stop coming in, the US gov't will then be forced to sell a greatly increased number of US Treasury bonds in order to make up the difference. As the author of my original post points out, it's not a 'given' that these new US Treasury bonds will have a line of willing foreign buyers waiting ... and if not the US will either have to raise the interest rates sky high to attract buyers, will have to borrow money from foreign sources by other means, or will have to simply print additional money.

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    Default Re: USA in danger of losing AAA credit rating ...

    I have thought for some months now that any bond issued in US dollars is in effect not AAA rated. If it is in dollars it must have some potential structural problem somewhere and thus be higher risk. O course this is all relative. With all the sudden extra government borrowing in the last few months what bond is safe.

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