Countries around the world are experiencing morose economic situations. The Unites States and Europe are included with those that desperately need a severe financial metamorphosis. However, it is Europe that is afflicted with the reputation of being a worse debtor than America.
In spite of this, and irrespective of political dogma, governments generally tend to neglect their economic responsibilities. Undeterred by this mere fact, debt collectors trust governments more than corporations. The bankers are so certain about government payback that they offer them interest rates beneath those offered to corporate borrowers.
The fantasy ends, as they all do, but it’s too late…the money has already been given and used up. The creditors become faint when they reminisce about the past and wonder how they will be repaid, because everyone knows governments’ yields come from seizing instead of manufacturing. What if they can’t seize enough to pay back their debt?
Just look at the credit default swaps (CDS) for a five-year Treasury note versus a five-year Johnson & Johnson bond. The latter is cheaper to insure than the US Treasury note. Why? Look at the comparison and decide who you would lend to:
• Johnson & Johnson – 125 years in existence – AAA credit rating – $14 billion profit annually
• US Treasury note – 222 years old – AA+ credit rating – over $1 trillion deficit per year
The CDSs function in almost the same way as a typical insurance policy in that if the debtor has a bad reputation for paying, then the insurance will cost more. And we can see how unsatisfactorily the US Treasury stands.
Europe has also felt the heat of downgrading, which just sums up the manner in which governments deal with their debt. They don’t respect it and, thus, will not repay all or any of it.
Even though they don’t pay, they are digging a deeper debt hole. On the other hand, corporations are enjoying profits that are well deserved because they have realized how to fortify their balance sheets with cold, hard cash.
Look again and compare:
2001
• US debt level – debt-to-GDP vacillated more or less 60 percent
• S&P 500 companies – debt-to-revenue escalating at 90 percent
2007
• US debt-to-GDP tiptoed to 66 percent
• S&P 500 companies – debt-to-revenue soared to 111 percent
In all this, the US debt level continued rising as Corporate America’s cascaded way down.
The US deficit now stands at the trillion mark, with debt-to-GDP at almost 100 percent!
Gold and silver prices are going to jump right at you once all this kicks in…loss of faith in government will overwhelm every aspect of our nation, including its currency.
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