Thursday, July 14, 2011

Don't worry: The US aint going broke til the Fed runs out of digits

Moody's place US on downgrade watch, warns the Drudge Report.

Moody's, that's the privately owned ratings agency that gave triple-A ratings to all those crap mortgage bonds.

In fact, Moody's are so useless, they even downgraded themselves.


The truth about this and all financial news was revealed to me when I was a kid, and a friend, the son of the CEO of a well-known multinational corporation, explained to me that the only reason any sensible person attends a cocktail party is to hype stocks they intend to sell in the morning and trash stocks they want to buy in the morning.

That, chiefly, is the function of the financial news. Plus it fills the space between the ads on the business pages of the newspaper and creates market volatility, which drives up market volumes, which keeps the brokers in funds.

The truth about the US Government's credit status is that it cannot default on its debts as long as they are denominated in US dollars, because the US Government, with the collaboration of the Fed, prints its own money. That means US Government debt will always be redeemed at full face value, either with crisp newly printed US dollars, or with funds raised by rolling over the debt through the issue of new bonds.

But what about the "debt ceiling?"

In theory, Congress has the power to deny the US Government the freedom to print money, aka, quantitatively ease. But this they will never do, unless they wish to create a financial crisis, which will help fill the space between the ads on the business pages of the newspaper, and creates market volatility, which -- oh, but I said that before.

Of course there are folks who don't like to see the US print money, but so what?

The Chinese see that printing dollars lowers the value of those already printed, of which the Bank of China owns a trillion or more. But again, so what?

If the Chinese don't like seeing the value of their dollars depreciated, they know what to do: spend 'em now, which of course would be great for the US economy.

Let's see, how could America's foreign creditors, who own about four-and-a-half trillion dollars worth of Treasury debt instruments, spend their dollars?

I'd suggest the stock market. At current prices they could pick up America's top 20 corporations, including Exxon, Apple, Microsoft, Chevron, GE, IBM, Berkshire Hathaway, etc.

Or they might consider farm land. The US has about a billion acres, so at an average of $4500 per acre, America's foreign creditors could pick up the entire cultivable portion of the United States.

But they might prefer urban real estate, in which case they might pick-up all of the 14 million empty houses in the US (estimated value around $2 trillion), or some other component of America's $20 trillion worth of commercial and residential real estate.

A serious attempt by America's foreign creditors to do any of the above  would obviously have a variety of interesting repercussions.

With all that cash flowing into circulation, the US economy would experience an explosive boom.

Stocks would zoom: Dow 35,000 here we come.

Real estate would rebound. Crap mortgage bonds would soon be fully valued. Bail-out funds loaned by the Fed to banks would be repaid.

Inflation would roar as happy home-owners and stockholders once again enjoyed the wealth effect.

The dollar would fall, curbing imports, boosting exports.

Unemployment would fall. Government welfare expenditures would fall. Government revenues would rise. Deficits would be eliminated and the Fed would engage in repeated action to slow the boom.

Yes, as long as the US remains mired in the recession, raising the debt ceiling and printing more money is the only way to go. For those with US dollars, the best bet is to invest them in real assets (stocks, land, oil, etc.) or spend them now, which is good not only for those who spend but for the US economy too.

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