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U.S. Government Debt Crisis is Financial Armageddon

Interest-Rates / US Debt Feb 22, 2010 - 09:12 AM GMT

By: Martin_D_Weiss


Best Financial Markets Analysis ArticleIf you thought Wall Street’s debt crisis was traumatic, wait till you the see the consequences of Washington’s debt crisis!

Never before in history has a world power like the U.S. been so utterly buried in debt! And never before has that debt been financed so massively by foreign investors!

Nineteenth century Mexico, Spain, and Argentina accumulated so much debt, they were forced to default.

In the 20th century, a similar fate befell Germany (1932) … China (1939) … Turkey (1978) … Mexico again in 1982 … Brazil and the Philippines (1983) … South Africa in 1985 … plus Russia and Pakistan in 1998.

Argentina kicked off the 21st century with a default in 2001. And barring a euro zone rescue, Greece, Spain, and Portugal are prime candidates for debt defaults this year.

But in NONE of these examples did we — or do we — see the debt crisis striking a dominant world power! In ALL cases, the debts represent little more than a small fraction of the total debts outstanding worldwide.

Not so in our case today!

In the entire world, the United States government and its agencies have, by far, the largest pile-up of interest-bearing debts ($15.6 trillion), the largest accumulation of unsecured obligations (over $60 trillion), the largest yearly deficit ($1.6 trillion), and the greatest indebtedness to the rest of the world ($4.8 trillion).

In proportion to the size of its economy, one important country, Japan, does have more debt than the U.S. But unlike Washington’s debts, nearly all of Japan’s are financed by its own citizens — loyal, long-term savers who are far less likely to pull out in a storm.

Washington’s debt crisis represents a unique, unparalleled, and unimaginable convergence of circumstances. Because no one can answer this simple question being asked by former GAO chief David Walker:

Who will bail out America?

Not you, not me, and not 300 million Americans! Not China, not Japan, nor all the powers on Earth put together! They’re simply not big enough. They don’t have the money.

Yet, despite the utter gravity of our plight, nothing is being done to change our course.

In recent weeks, Congress could not even agree to study the issue. They could not vote on a deficit commission.

The president has just appointed a separate commission. But even after moons of deliberation, it will have no authority to bring its recommendations to a vote in Congress — let alone get them passed.

The president says that the effort must be bipartisan, that all options must be on the table, and that no cows can be sacred.

And indeed, this song sounds good. But it’s more out of synch with political reality than rap rock at the Bolshoi Ballet:

  • Democrats vow never to cut to Social Security or Medicare …
  • Republicans vow never to accept tax hikes, and all the while …
  • Economists swear that only a full-court, frontal attack on the deficit has any chance of making a dent.

My family and I — plus many others more illustrious than us — have been warning about this danger since 1960.

That was the year my father, J. Irving Weiss, founded our Sound Dollar Committee, organized a nationwide grassroots movement, and helped prompt 11 million telegrams, phone calls, and letters of protest to Capitol Hill.

That was the effort which persuaded Congress to vote for a balanced budget and helped give President Eisenhower a victory the likes of which has never been seen again.

In subsequent years, Dad and I nagged, cajoled, and testified before Congress so often I lost count.

Irving Weiss

I think we gathered more evidence and made more phone calls than a telethon phone bank.

But our warnings have typically been given little more than the time of day.

And always — ALWAYS — the so-called “solution” has been the same: more borrowing from Peter to pay Paul, more can-kicking down the road, more smoke and mirrors, more lies.

The Consequences of This Complacency Are Catastrophe

To whit …

Consequence #1. Due to the avalanche of government borrowing to finance the deficit, there is no power on Earth that can avert sharply higher interest rates.

Irving Weiss

Already, despite the weakest post-recession recovery in memory, bond prices are plunging and their rates are surging.

Just a few weeks ago, the yield on 30-year Treasury bonds busted through a declining trend that had not been penetrated in more than 20 years.

And just last week, it came within a hair of its highest level in over two years.

With just one more, ever-so-slight nudge to the upside, all heck could break loose in the Treasury-bond market. You could see a surge in long-term interest rates that will make your hair curl.

If the U.S. economy could boast a booming housing market or low unemployment, this would not be such a shock.

Or if consumer price inflation were surging, it would also not be so unusual.

What’s so damning about this action in the bond market right now is the fact that it’s coming at the worst possible time.

That’s why Washington and Wall Street fear it so much. That’s why they’re so anxious NOT to tell you about it.

Consequence #2. All long-term bonds — whether issued by other government agencies, corporations, states, or municipalities — will also collapse, driving their yields through the roof.

Reason: When Uncle Sam has to pay more to borrow, they inevitably have to pay more as well.

Consequence #3. Rates on mortgages and car loans will surge. Why? For the simple reason that they’re also tied at the hip of long-term Treasury rates.

If you want to take out a 30-year fixed mortgage (now close to 5 percent) on a median-priced home ($178,300), and you can afford a 10 percent down payment …

  • Just a 1 percent rise in rates will drive your monthly payment from $861 to $962 …
  • A 2 percent increase will drive it to $1,068 …
  • And the kinds of rate increases possible in a bond-market collapse could drive it to levels only Midas could afford.

Worse, if you go for variable-rate mortgages, balloon mortgages, or other now hard-to-get alternatives, the impact of surging interest rates will be even more traumatic.

Consequence #4. The fledgling recovery in housing and auto sales — the pride and joy of Washington’s bailout brigades — will be toast.

Consequence #5. Institutions and individual investors holding piles of lower yielding long-term bonds will get killed. That includes:

  • U.S. households stuck with $801 billion in Treasuries, $979.5 billion in municipal bonds, plus a whopping $2.4 trillion in corporate bonds.
  • Banks and credit unions holding $199 billion in Treasuries, $228 billion in munis, $1.066 trillion in corporate bonds and, worst of all, $1.408 trillion in government agency (and GSE) bonds.
  • Insurance companies buried in Treasuries ($196 billion), munis ($444 billion), agency bonds ($469 billion) and a TON of corporate bonds — $2.180 trillion.
  • Private pension funds, state and local governments, and even their employees’ retirement funds — all loaded with similarly vulnerable bonds.

Not all of these holdings are of the long-term variety. But most are.

Investors and institutions who own them on behalf of millions of retirees will suffer shocking declines in the market value of their portfolios.

They could suffer a chain reaction of defaults, gutting their income stream.

And worst of all, they now have some reason to fear the de facto default of the biggest debtor of all — the government of the United States of America.

I doubt very much we will see THAT happen. But two events are very possible, even likely:

  • America will lose its triple-A rating. And if the Wall Street rating agencies don’t have the moral fiber to announce downgrades, the marketplace will do it for them.
  • Our leaders will face an Armageddon unlike any since the Civil War: Either muster the courage — and the support of the people — to accept the pain and make the sacrifices of a lifetime … or face the downfall of America.

They will no doubt seek every other alternative and try every other trick. But alas, no printing press can run faster than our foreign creditors can sell their U.S. bonds. No one will bail out America.

Ultimately, there is NO choice.

We must bite the bullet. We must make the sacrifices. Like California and Greece … like every household and any company … our government MUST cut back and accept the rest of the consequences:

#6. Declining home values.

#7. Falling stocks.

#8. The end of the recovery!

And many, many more.

My recommendation: Hold on tight. Don’t veer from your safety-first approach.

Good luck and God bless!


This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit

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23 Feb 10, 02:29

What about the value of the US dollar if your scenerio plays out?

1. US Dollar rises because of the rapid rise in interest rate.

2. US Dollar falls because the world dispose the dollar in favour of other monies.

Which one is true?

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Biggest Debt Bomb in History