Monday, November 24, 2008

America's Default

"Default is the failure to honour contractual obligations. In the case of debt, non-payment of interest or principal payments due to the lender. The financial impact of default is the loss suffered by the lender. ... Given that in a typcial sovereign default the investor loses 50% to 80% of the value of the investment, the [foreign exchange] losses suffered are not far short of default. Despite 'strong dollar' official policies, a case can be made that the US is in the process of defaulting on its obligations via a systematic devaluation of its currency. ... Lawrence Summers [LS], a former Deputy Secretary of the US Treasury, proudly extolled the merits of the US financial system in a 2001 speech at the London Stock Exchange in the following terms, 'the United States is the only country in which you can raise your first $100 million before you buy your first suit.' He gave short shrift to critics who felt that US financial sophistication was synonymous with financial instability: '[That belief] is observed in inverse proportion to knowledge of these matters.' ... Confidence in US financial markets has suffered. The growth of the network of securitisation and off-balance sheet vehicles--the 'shadow banking' system--without regulatory oversight to the point where it now threatens the financial system has perplexed foreign observers. ... The real reason that the US has actually not experienced a sovereign debt crisis is that it finances itself in its own currency. This means that the US can literally print dollars to service and repay its obligations. ... The dollar's dominance may be coming to an end. ... The artificial nature of the Euro and its long term survival is also problematic. ... Does any of this matter? Walter Wriston, then chairman of Citigroup, opined that: 'Countries don't go broke'. In 1982, shortly after this statement, Mexico, Brazil and Argentina defaulted inflicting near mortal losses on Citibank. ... Max Winkler ... noted [in 1933]: 'The history of government borrowing is really the history of government defaults'," my emphasis, Satyajit Das, 10 November 2008 at http://www.rgemonitor.com/us-monitor/254332/we_interrupt_regular_programming_to_announce_that_the_united_states_of_america_has_defaulted.

I note LS became Treasury Secretary. If I ever took a class with Harvard's LS I would likely have gotten an "F", given my beliefs about financial "sophistication". I have likened the shadow banking system to US "wildcat" banks in the 1800s. Das and I have said many of the same things. Winkler is correct about government defaults. See for example my 4 July 2008 post. As for Wriston, I reviewed his last book on 30 October 2008. Less than favorably. Bonds are "A graveyard for capital", my 2 February 2008 post.

3 comments:

Anonymous said...

'The history of government borrowing is really the history of government defaults'

Oh yeah IA...

I worked for a bank that had large framed sheets of "coupon bonds" from various sovereigns that had defaulted over the last several hundred years... just a little reminder of "credit risk"...

So that meant the bank made it a point to know the various government leaders that lead the sovereigns... best way to determine true credit risk... generally the bankers know more about the nations finances than the leaders do... the bankers were the "institutional memory" ... funny that...

Happy/A

Edgar Alpo said...

from money.cnn:

Still, the fact that Citi needed a new lifebuoy from the government less than a month after getting an infusion via the TARP capital purchase program shows how the entire financial system is laboring under an unmanageable debt load. The problem, analysts say, calls out for much larger infusions of taxpayer funds, in the name of stabilizing the financial system - as well as restructurings that give officials time to completely fix problems at troubled institutions...

Anonymous said...

Gonna happen here and it's not going to be a mistake that it will happen under the Democrats. Having to renege on FDR's SS and Medicare in the process just as the boomer's 401k's and home values are falling like a rock.