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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

The Reality of the Debt Ceiling Drama

Politics / US Debt Aug 01, 2011 - 04:41 AM GMT

By: Mike_Stathis


Best Financial Markets Analysis ArticleOver the past several weeks, the media has had a field day covering the debt ceiling talks between both political parties. It’s been dominates news headlines for more than a month. Prior to the latest distraction by the media, the focus was Casey Anthony, followed by Congressman Weiner, then Casey Anthony again. 

I wasn’t even aware how large of a media campaign on this topic was (since I don’t waste time watching TV) until I was visiting some relatives for a few days. During my visit I was exposed to the media circus show that my relatives had been glued to.

I have not discussed the debt ceiling talks, other than brief mention in our research publications. The reason why I have not spent time discussing this topic is because it is not really worth mention. In short, it has been a complete fabrication engineered by both parties as a manner by which to muster political power for the 2012 elections. 

Everywhere you look you see people talking about it. It’s shocking to see how people believe anything the media and Washington keep repeating. I would have thought that at least some Americans learned not to trust Washington or the media after the WMB charade.  

Yet, everyone else seems to think the issue is critical as discussed by the media. Indeed, it is remarkable to watch American puppets who actually think the debt ceiling issue is relevant. If you have been glued to the TV to hear the debt ceiling drama, you have been wasting your time.

In order to keep things grounded, you need to understand that several forces are touting a debt default as a manner by which to exploit people for political and financial gains. 

For instance, late last year Meredith Whitney discussed her ridiculous predictions of municipal defaults on 60 Minutes. The piece was journalism at its worst, designed to create drama and boost the dwindling ratings 60 Minutes continues to receive.  I set the record straight on Whitney.

See here >> Deconstructing Meredith Whitney's Default Predictions.

Here, I present the realities of the debt ceiling issue. However, I will not spend much time on this topic because I can think of several other ways to spend my time more wisely, such as sleeping. 

Let me point out a few things so you can fully understand the realities of the debt issue.

With about $14.3 trillion in total debt, Washington is looking to do something that has served more as a gesture than anything else. For nearly 50 years, Washington has raised the debt ceiling by more than 70 times. It has been this trend of raises that has enabled fiscal mismanagement by Washington for decades.

Does Washington need to rein in spending? 

Certainly. However, the current debt ceiling drama has been engineered in order to mentally prepare Americans to accept cuts to vital programs, while ignoring Bush's tax cuts for the wealthy and continuing the most costly and unnecessary war in history. As a part of these theatrics, politicians from each side of America's fascist government are using the drama they have created in order to further their own political aspirations.

So what is involved in raising the debt ceiling?

All that needs to be done is for Washington to put an end to the drama is to approve a high debt ceiling and the U.S. Treasury issues more government bonds to finance spending. 

What happens when the debt ceiling is raised? The U.S. Treasury issues new bonds into the market, and investors buy them based on demand and supply. The proceeds are used to fund U.S. government operations. 

Many individuals have discussed that foreign nations no longer want to hold U.S. bonds due to the vulnerable situation of the U.S. economy, as well as the reckless destruction of the dollar by the Federal Reserve.

While the U.S. economy certainly remains in a vulnerable situation and is not likely to mount a real recovery anytime soon, the fact is that foreign investors will continue to buy and hold U.S. government bonds, for reasons which I will explain.

The real secret is that there has never been any threat that this new debt won’t be funded via the purchase of government bonds. Why?

Quite simply, we can thank our friends in Saudi Arabia for that. You see, ever since the Saudis demanded the U.S. dollar for oil payments in the mid-1970s, the dollar has been the irrefutable reserve currency.

Certainly, prior to that time one could argue the dollar’s status as the world currency due to its dominant trade and consumption dynamics. However, it was not until the Saudis began demanding dollar payments for oil that the dollar truly became the universal currency. Shortly after this decision by the Saudis, all of OPEC followed suit. 

What’s the relevance of this?

As a result of the requirement for U.S. dollars for oil, the U.S. is in a unique position because the world is held hostage to the dollar. Because crude oil is denominated in U.S. dollars, you must have the dollar to buy oil everywhere in the world, with one exception. Moreover, this also applies to all commodities. 

What is the exception?  Iran.  The newly-launched Iranian Oil Bourse only takes euros for its crude oil. I discussed plans for this oil exchange five years ago in America's Financial Apocalypse. As you can imagine, Iran's oil bourse poses a potential threat to the U.S. economy is other large oil producers follow suit. It is for this reason that the U.S. government has been trying to come up with excuses to invade Iran.  

As a result of this dollar-oil link, the U.S. has been able to export inflation throughout the world for decades. As simple as this reality is, remarkably you never hear anyone discuss it. See here >> The Big Secret About Oil

What are the investment implications of the dollar-oil link? 

This should be obvious to all competant financial professionals. The best hedge against inflation in the U.S. is oil. Commodities (excluding gold and silver) also provide nice hedges.

Amazingly, the gold propagandists have continued to scare Americans with claims of imminent hyperinflation so as to encourage the purchase of gold. The fact is that hyperinflation is a virtual impossibility in the U.S., at least in our lifetime. I have detailed this analysis many times in the past.

See here >> Why Hyperinflation Isn't Coming to the U.S. 

                >> Don't Bet on Hyperinflation

                >> Dismantling John Williams' Hyperinflation Predictions

                >> Understanding Manipulation of Gold by the Media

                >> Max Keiser, Alex Jones and their Lackeys Scamming People AGAIN

Furthermore, gold does not protect against inflation, as I have documented many times in the past, beginning with America’s Financial Apocalypse. Thus, the reasoning used by gold bugs to support the purchase of gold is completely invalid.

See here >> Understanding the Proper Use of Gold and Silver

                >> Fool's Gold

                >> Beck & Co.: Cashing in through Scare Tactics

Gold is in a bull market independent of inflationary concerns. While gold has been a “safe haven” for investors historically, this relationship relates more to short-term asset reshuttling. 

Politicians and economists alike have continued to insist that the debt ceiling must be raised in order to prevent a default of U.S. Government debt. These individuals claim that such an event would cause a severe economic crisis, with a certain double-dip recession.   

The fact is that the recession which began in December 2007 never ended, as I have continued to insist since the establishment economists claimed it ended in June 2009. Furthermore, a so-called “double-dip recession” has no merit. The term is complete propaganda. I discussed this reality several months ago.

See here >> Double-Dips, Economics and Ice Cream Cones

When we consider the probability of default it becomes very important to understand the process precisely. First, a default occurs because a debtor is unable to continue making interest payments on borrowed money.

Notice I said “unable.” The fact is that Washington has manufactured this so-called debt ceiling crisis. The U.S. Government can easily continue to make interest payments on its debt. The real issue is fiscal responsibility. And this is where both parties are seeking to gain points from voters. 

Next, keep in mind that foreigners own about $4 trillion of U.S. Government debt. The remainder is held by U.S. citizens and financial institutions (about $6 trillion), as well as borrowed money from U.S. trust funds such as Social Security (about $4 trillion). 

Moreover, note that the number one holder of U.S. debt is China, with about $1.1 trillion. China really has no choice but to hold this debt due to trade surpluses. As well, China will do anything it can to keep U.S. interest rates low so U.S. consumers will continue to buy Chinese imports. 

The second largest holder of U.S. Government dent is Japan, with nearly $1 trillion in U.S. debt. Similar to China, Japan holds U.S. debt largely due to its trade surplus with the U.S. In addition, Japan remains America’s top ally, second only to the UK. There is no way Japan would see U.S. debt under any circumstances. The third largest holder of U.S. debt is the UK.

The bottom line is that the U.S. faces no risk of a real default at this point unless Washington decides to default voluntarily. Even so, a default would not mean much other than a short-term reaction in the capital markets. This is important to keep in mind because profiteers are drooling as they see the drama unfold, insisting that gold is the solution for investors. We have heard that America is in a similar situation as Greece and even Zimbabwe. This is complete rubbish. Anyone who makes these claims is either an idiot or lying in order to scare people into buying gold and drum up foreign currency trading commissions. But if you live in the U.S., gold isn’t going to help you one bit if a default were to occur. As long as oil and commodities continue to be priced in dollars, the dollar remains the world’s safest currency. And as long as the U.S. maintains its military dominance, no nation can make the U.S. repay its debt.

Finally, I find it remarkable that both parties are looking to attack the nation’s entitlement programs when the fact is that neither Medicare nor Social Security have contributed to the deficit. While this is expected to change in coming years, the fact is that Americans have funded and will continue to fund these programs. In contrast, wasteful tax breaks for the wealthy continue to add trillions to the federal debt. 

Moreover, no one in Washington has even discussed removing troops from the Middle East. Already the Iraq War is expected to cost at least $4 trillion. If the U.S. Government truly has a debt problem, don’t you think our politicians should first repeal the Bust-era tax breaks for the wealthy as well as remove troops from the Middle East rather than slice away at critical programs like Medicare, Medicaid and Social Security, programs that Americans have paid for?

The fact is that America has a fascist government and has for decades. Washington cares only about corporations, Wall Street and the wealthy. And when it comes to issues that matter most to the American people, such as their ability to put food on the table and access to affordable healthcare, both parties agree; they are going to screw you. They are going to whittle down your Medicare and Social Security benefits while continuing to demand you pay for these programs. Instead, this money will continue to fight wars for Israel. See here >> Obamanation

So let me review the important facts presented in this article so you can have a take away.
  • The debt ceiling talks and possible default are completely manufactured by Washington as a way to score political points.
  • There will not be a real default of U.S. debt anytime soon. Instead, the drama will be used to steal more wealth from Americans. 
  • Political power between parties is meaningless because both parties are essentially the same.
  • The Saudis exert the most control over the U.S. economy due to the dollar-oil link, which enables the U.S. to export inflation throughout the globe.
  • Oil is the best hedge against inflation in the U.S. due to the dollar-oil link.
  • Gold is not a hedge against inflation.
  • Most U.S. debt is held by the U.S. Foreign holders of U.S. debt make up only about 25% of total outstanding debt.
  • The top three foreign holders of U.S. debt either need to hold the debt in order to add to their trade advantages or will hold U.S. debt because they are amongst America’s strongest allies.

Finally, I’d like you to keep some points in mind. Just because you keep reading and hearing something over and over again doesn’t make it true. The reality is that the vast majority of people are followers rather than leaders of thought. 

When you see people quoting what others have said, that means they are followers. At times it’s okay to follow others as long as those you follow know what they are talking about, have excellent track records and no agendas. Accordingly, I suggest you research every individual cited by authors so you can determine if the author has a clue. 

It is critical to make these points because anyone with a PC and Internet connection can submit articles to websites. What you should focus on is the credibility of those who write articles. Are they trying to manipulate sentiment? Are they qualified to discuss the topics they write about? Do they conduct independent research, or do they get their ideas from reading the opinions of others? Do they have agendas?  

Finally, I do not have any agendas. I do not sell gold or securities and I do not make money from advertising. For those who truly understand the deceitful nature of the media, the fact that the media has banned me helps confirm my expertise and unwillingness to sell out, unlike many others.

As a result, if you aren’t seeing people who write about economic and financial issues quoting my forecasts and insights, you should assume they are either sheep or hacks. That said, I have never seen anyone cite any of my forecasts or commentaries despite the fact that I predicted everything in detail five years ago in America’s Financial Apocalypse. That should tell you how trustworthy the media and their so-called experts are. The situation is even worse online. 

If you still have not read America’s Financial Apocalypse (especially the 2006 expanded version) you would wise to do so, as it is the most accurate and comprehensive predictor of the economic collapse.  This was the book that resulted in me being blacklisted by the media. Figure it out folks. They don’t want you to know the truth. 

If you want to move ahead of the curve, subscribe to one of our newsletters while the promotional rates are still around.


By Mike Stathis

Copyright © 2011. All Rights Reserved. Mike Stathis.

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.


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