U.S. Dollar Collapse: U.S. Citizens are the Holders for the Massive Amounts of Government Debt, Which Cannot Be Paid under Any Circumstance

A Vision of 2011 and Beyond

February 3, 2011

David Freedom - The world’s banking system (which is the western banking system) has the same problems that existed before the collapse in 2008, with two exceptions:

1) The problems are much larger; and

2) They have been shifted to the public.

Since 2008, the Fed has loaded up on all sorts of “toxic debt”, including Fannie & Freddie (MBS), FHA, US Treasuries ($900B) and many more. Newly issued US debt ($2T annual deficit) is being purchased/monetized by the Fed and those holdings along with all the previously mentioned toxins are now backed by the US Treasury.

As of October 20, 2010 the Fed’s balance sheet exceeded $2.3 trillion ($832b in Treasury debt). What's the Fed's plan to manage this liability in the event of a dollar collapse? Suffices to say, the US citizen is now the largest debtor in the history of the world.

Who’s Holding the Bag?

The Bernanke recently stated publically that:

“Under a scenario in which short-term interest rates rise very significantly, it’s possible that there might come a period where we don’t remit anything to the Treasury for a couple of years. That would be I think a worst-case scenario.”

You need to understand that all of the Treasuries purchased by the Fed will soon be ‘under-water’ which would result in the Fed being insolvent. This new twist allows the Fed to pass losses to the Treasury via interest payments (or lack of) on the US Treasury Bonds (i.e., paid by the US citizens).

In simple terms, the US citizens are now the holders (back-stop) for the massive amounts of debt, debt that CANNOT be paid under any circumstance. That means the next insolvency crisis, which is a certainty, will be one of a sovereign nature. This fact changes significantly how the markets will react.

What Ignites the Next Blaze?

The potential list is long, so I’ll mention only a few. All of these things could happen in the next couple years, the first of which will start a fire the likes of which we’ve never witnessed. It could be US municipal defaults, policy shifts from the Chinese, a EU crisis, or an expanded war in the Middle East. I could go into detail about the crisis-solution agenda, but I’ll leave that for another day.

The US Market

QE2 is set to expire in June 2011 and The US Congress will need to address the debt ceiling by March. Expect the debt ceiling to be revised up in the near future and QE3 will probably be masked under a different name, but make no mistake, it’ll be money printing all the same. My understanding is that the banking system intends to continue increasing credit/debt throughout the world.

Through the next month or two (through Feb) we’ll likely see a continued rise in commodities and US equities. Picking a line in the sand is tricky business though, so making preparations now is prudent.

As food and energy prices rise, nations will feel the sting of money printing (already happening). This will only increase the number of civil protests (RIOTS). Developing nations will feel the brunt of higher inflation, which will lead to various measures to control price increases (e.g., Russia’s recent announcement of food controls or COMEX margin hikes). The increased costs of commodities will be a drag on the world’s economy as well as the attempted policies to control the rise. As a result, I expect significant volatility throughout 2011.

The global slowdown will lead to a drop in US markets by the middle of the year, giving the Fed impetus for more money printing. For anyone still expecting a return to ‘normal’, 2011 will be a wake-up call.

Beyond 2011

Similar to the “Choose-Your-Own-Ending” books (remember those?), the Fed has gone too far down the easing path to save the USD as it exists today. In the short-term, the USD is still being managed by the Fed, but this is only a temporary mirage. For the sake of this article, let’s assume they try (though highly unlikely) to restore confidence in the USD. The Fed could allow the bad debt to default (written off). As defaults rage the USD would skyrocket, due to massive liquidations and to a lesser extent, the safety trade. However, as a result of massive defaults, US banks would immediately be unable to honor deposits. Of course, the government could "back stop"/guarantee all the banks, but then we’re back into easing which puts the currency at risk.

In addition to the banking collapse, The Fed and US Treasury (as the Fed’s back-stop) would default. Since this would be a sovereign default, and the USD is stock of that sovereign entity, the USD would collapse. There is one possibility in reviving the USD, albeit under a new/old system. That new system would require a huge revaluation in US gold holdings to be used as backing for the new USD. Jim Rickards has done some good work on the process and price of gold to make it a reality. Whether this happens or not remains to be seen.

As we work through this crisis, there will be a combination of defaults and austerity. Pensions will be slashed, state assets will be sold to the highest bidder (at massively undervalued prices), while new and existing taxes are imposed on the citizenry. Government services will be slashed and newly privatized assets will increase all types of expenses -- things like water, energy and transportation. See the IMF blueprint for how this works, or ask an Argentine.

Civil unrest will increase dramatically, in places never before expected. Tensions between nations will rise and war will inevitably breakout throughout the globe. Sound gloomy? This too shall pass.

What to do?

If you have wealth to protect, a minimum of 30% should be held in gold, silver or productive land. I do not advocate 100% into PMs. Although the outcome of the USD is abundantly clear, current laws enforce the USD which should be held for expenses, emergencies, purchases and so forth. Rather, I suggest 30% be stored in physical gold and silver, 30% in cash and 30% in growth. Within the growth category you will have many paper options and should look to exceed the rate of inflation. As a further precaution, it’s advantageous to hold assets and citizenship outside of your primary residence.

The issues we face today are extremely complex and although the outcome appears certain, the specific events and timeline are impossible to predict. By maintaining a sound portfolio, you will afford yourself the most protection against a variety of financial outcomes.

Non-Financial: You should have water and food stocks along with necessary supplies, such as water filters, alternative heat sources, community networks and other essentials for surviving disasters. In all likelihood, systems will continue to function, but on a temporary basis, these items will keep you comfortable (relatively).

Learn who you are and what’s important to you. Find the meaning of your existence and strive to fulfill your purpose. Live in harmony with your surroundings and community. Love God and men. Don’t follow any institution and think for yourself. When making charitable donations, give them personally. I advise reading the bible (KJV), starting with the New Testament. Most importantly promote and vigorously protect freewill. If the Euro crashes, reduce USD positions!

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Originally Posted by fledgling

Question regarding "If the Euro crashes, reduce USD positions!" What will the Euro Crash look like, an accelerated drop of 40%+? Get out of USD as fast as possible? Do you have a plan for exactly what that would be? barter items, pay off property, PMs I have some Canadian equities for the currency play, but the CAU will be right behind the USD, no?

January 28, 2011

Larso3 - If you see a 40% move in the Euro it’s already over. The beginning, even if it’s full-on collapse, will be much less. Anything even approaching a single-day move of 10% against the world’s major currencies and it’ll be time to batten down the hatches (IMO).

A currency crash can happen very quickly. Already all the pieces are in place, only a catalyst is needed (i.e., a spark). In the event it’s a full-on collapse, it will take place in as little as a couple weeks, with a couple short-term rallies in between major down moves. If it’s an orderly expulsion, it will take much longer -- this is the best case.

For now, I’m preparing like it’s going to be orderly. If and when it becomes disorderly, that’s when you’ll need to hit the exits fast.

As far as why reduce USD (or any currency) if the Euro dives -- Any big move in the Euro would have a massive impact of the world’s economy, including the USD. A significant move down in the Euro would be the result of loss of confidence in the currency and subsequently all currencies.

If the Euro goes, it’ll be a tipping point for additional losses of confidence throughout the world. If this happens, it’s likely the USD would rise in the short-term compared to other currencies (US$ Index), but would fall relative to commodities and PMs. Like the analogy of everyone heading for the exits -- others will run too. There will be a simultaneous loss of sovereign funding (bond market). Although I suggested keeping cash, a quick and major move down in the Euro signals an imminent move to hyperinflation. The best bet would be to purchase necessities such as food items, tobacco, spirits and so forth -- barter items as you mentioned.

Outside of consumables, PMs, agriculture (including arable land), energy and natural resources will be a good place to put your reserves. These items should already be on your shopping list, but to go “all-in” now is a gamble.

Until you can be certain, I’m recommending accumulation of tangibles (arable land if you can generate positive cash flow), while maintaining a USD position. Until we have a definitive move towards hyperinflation, the ratio of USD should be based on net worth and financial situation. The ratios I provided are just a benchmark to be adjusted for each individual situation. Short-term bouts of deflation should be used as opportunities to accumulate.

The C$ will hold up longer, especially given it’s one of a few resource based currencies. The problem is that all currencies are fiat and tied to the same global system. As I mentioned, the C$ will hold up longer, which will act as a buffer allowing more time to reduce reserves in the event a collapse. All currencies should be reduced to the lowest levels required to fund operations if hyperinflation breaks out.

Within the ratios I provided, the growth portion of your portfolio should have significant percentages in resources. A sound portfolio offers protection for a multitude of outcomes. If the world economy thrives, growth positions will perform well due to increased demand. If it’s short-term deflation, cash will be quite valuable. For hyperinflation, PMs will be great and the growth portion will also do very well.

So here’s my “what’s happening for dummies” summary:

• The Congress worked with the Fed Reserve to inflate a gigantic housing bubble, using purposely loose monetary policy and extreme leverage.


• After banks made enormous amounts money packaging and selling MBS’ and other made-up derivatives, they sold what remained of the toxic shit at fantasy valuations to the American people, via The Congressional approved bailout.


• The American people got no bailout; many lost their homes or will lose them in the not too distant future.


• The Fed implemented QE2 to print money to replace the losses they are (and will) take on the toxins they bought from the banks at ridiculous valuations.


• The Fed plans on keeping interest paid from the US Treasury (American people) on the bonds they bought with printed money.


• The Congress will levy higher taxes on the American people.


• Interest rates will rise and the Fed will soon be cutoff, bankrupt, insolvent or whatever term you like. It won’t matter because the Fed was only being used to transfer astronomical amounts on money to its owners (International Bankers).


• The Treasury (American people) will need to cover the losses of the Fed, which took the losses of the banks.


• The American people are not going to like being bankrupt.

Where is the Dollar Headed?

December 27, 2010

ichina.com - This chart, which can be pulled up in almost any forex demo account for free, shows U.S. dollar weakness in the most liquid currency pair traded, the EUR/USD.

Over time interest rates tend to drive currency value, and the incredibly low interest rate in the U.S. has caused the dollar to be sold aggressively.

Thus, we come to the biggest fear of all: if investors want no part of the U.S. dollar during times of normal economic growth, and they want the U.S. dollar only during times of economic uncertainty because of confidence in the U.S. government, what will happen if investors lose confidence in the safety of the U.S. dollar?

Then, there would be no reason to ever hold the dollar.

Investors already want no part of the dollar during periods when the global economy is moving forward. If investor sentiment toward the U.S. shifted, and investors no longer felt confident in the sovereign health of the U.S., then the days a cataclysmic collapse of the U.S. dollar could be a realistic happening.

Another round of quantitative easing from the Federal Reserve is going to begin really worrying some investors. Keep focused on the sovereign health of the U.S. As soon as credit rating agencies begin warning the United States, then the early stages of a severe run on the U.S. dollar could begin to unfold [see next post].

Flashback: IMF Demands New Austerity Measures in Argentina

June 12, 2002

WSWS.org - The International Monetary Fund has continued to stall on sending a mission to Argentina to negotiate new loans, insisting the government of President Eduardo Duhalde implement still further austerity measures.

Duhalde and other Argentine officials had confidently predicted a swift loan agreement with the IMF after his government carried out a series of steps demanded by the international lending agency. These included the repeal of two Argentine laws that Western bankers saw as a threat to their operations in Argentina, as well as an agreement between the federal government and the provinces to restrict spending.

One of these statutes, the so-called “economic subversion” law, could have been used to prosecute bankers accused of illegal activities prejudicial to the national economy. Argentine investigators had begun probing the activities of major transnational financial institutions like Citibank, which were accused of illegally transferring truckloads of US dollars out of the country, helping trigger last month’s economic collapse.

The second statute struck down was a bankruptcy law that offered some protection to heavily indebted national enterprises. With the law’s repeal, the door is open to foreign creditors moving in and taking over assets of bankrupt companies lock, stock and barrel.

In a series of tense conversations with Argentine finance minister Roberto Lavagna, however, top IMF officials have made it clear that they are far from satisfied with the Duhalde government’s actions, and are demanding that he veto the measure repealing the economic subversion statute and undertake other actions.

The Peronist bloc in the national legislature succeeded in pushing through the repeal by a razor-thin margin, and the proposed veto, underscoring once again the Duhalde government’s complete subservience to the IMF and foreign banks, is seen as politically untenable.

The IMF’s objection is that while repealing the law, the legislature strengthened sections of the penal code dealing with economic crimes. The IMF claims these strictures would discourage investment. The foreign banks want a clear-cut guarantee that they can continue looting the country without fear of legal consequences.

One of those expected to benefit from the law’s repeal is Domingo Cavallo, the former finance minister who was forced to resign by mass demonstrations and rioting last December. He was jailed in April on charges of participating in illegal arms deals with Ecuador and Croatia in the early 1990s.

A judge has ordered Cavallo’s release, ruling that there was insufficient evidence to charge him, despite his having signed orders approving the arms shipments, which were ostensibly going to Venezuela and Panama.

A Harvard-educated economist who first served as a leading finance official in the military dictatorship that ruled the country from 1976 to 1983, Cavallo was associated throughout his career with policies that subordinated the Argentine economy to the needs of international finance capital, with disastrous consequences for the bulk of the population. It was widely expected that he would face trial on other, more serious charges associated with the scandal-ridden privatizations of state-owned enterprises in the 1990s, and alleged insider deals with Argentine and foreign bankers.

With his release and the repeal of the law, Cavallo is now seen as virtually immune to prosecution.

The IMF has also questioned the Argentine government’s plan for lifting the so-called “corralito,” or freeze on bank accounts, which was imposed six months ago. This measure left large numbers of middle- and lower-income depositors penniless. The plan calls for a “voluntary” conversion of the deposits into government bonds redeemable in three to ten years. It also allows for exceptions, including cash pay-outs for persons over 75 and those whose lives and health are at risk if they are unable to use their funds.

Rejecting any flexibility, the IMF is calling for a mandatory conversion to long-term bonds for all depositors, warning that the current proposal could unleash a new round of inflation.

The federal government reached agreements last month with key provinces to restrict state spending, which the IMF had characterized as excessive. In the course of discussions with the provinces on these measures, Duhalde himself admitted that the demands being made by the IMF could destroy another 500,000 jobs in a country where the official unemployment rate already hovers around 20 percent.

According to a report issued last month by the National Institute of Statistics and Census, half of Argentina’s 36 million people are now living below the official poverty line, lacking sufficient resources to pay for food, shelter and other basic necessities.

In the hardest hit provinces, the situation is far worse. In Corrientes province, for example, 90 out of 100 inhabitants are indigent. In Formosa, the poverty rate is 89.4 percent; in Chaco, 88.8 percent; in Jujuy, 87.7 percent; and in Entre Rios, 86.7 percent.

There are mounting reports of hunger throughout Argentina. In one of the many shantytowns surrounding the town of Quilmes, just 20 minutes outside the capital of Buenos Aires, the principal of the local school told reporters that families were eating rabbits, rats and frogs to survive. The mayor of the town acknowledged the problem, insisting that the funds provided by the federal and provincial governments were not sufficient to provide any food assistance, including school lunches.

The principal, Diana Barolich, told the press that the children report daily how their parents search desperately for food. “With the rats, they cut off their heads, and adults try them first to see if they’re all right” to give to the children. This is occurring in a country that was considered Latin America’s most prosperous, and ranked among the greatest beef exporters in the world.

Duhalde and other government officials have bristled at the IMF’s insistence that still another set of conditions must be negotiated before approving a new loan. Nonetheless, the Peronist president, who has repeatedly insisted that he has no “Plan B” if the country does not submit to IMF demands, is expected to submit. The agency cut off lending to Argentina last December after the country defaulted on foreign debt payments.

The IMF has not indicated what type of mission it intends to send to Argentina. While the Duhalde government had predicted that a negotiating team would soon arrive in Buenos Aires to hammer out a new loan agreement, IMF officials have spoken of an “exploratory” or “technical” mission, indicating that any deal will still require extensive talks and new conditions.

Once talks do get under way, they will center on drafting a letter of intent, committing the government to a set of economic and monetary targets that must be met to continue receiving IMF credits. These will inevitably mean further austerity and deepening misery for Argentine working people.

Throughout the 1990s, Argentina was touted as a model for IMF prescriptions, achieving growth rates based on the sell-off of state enterprises, while policies of strict austerity and dollar-peso convertibility led to the ruination of the middle class and drove large sections of the working class into unemployment and poverty. Both the IMF and the Bush administration appear determined to continue these policies, while sucking what wealth remains out of the country.

One sign of concern that the results may be another revolutionary upheaval came with the recent visit to Buenos Aires by Assistant Secretary of State for Intelligence and Research Thomas Fingar.

According to one press report, Fingar “made a 38-hour inspection tour to evaluate the state of preparedness of the armed forces and the police forces in case of a sharpening of social conflicts in the coming months.” He was disturbed, according to this account, to learn that the federal police had lost electric power because of the government’s failure to pay the bills.

Meanwhile, Washington’s apparent indifference to Argentina’s economic meltdown came under fire at a June 10 meeting organized by the Organization of American States. Cesar Gaviria, the OEA secretary general and former president of Colombia, described the US position as “not very constructive,” and warned that continued neglect of the Argentine crisis would prove “very dangerous” because the economic breakdown could spread across Latin America, creating political instability and social upheavals.

“If there is not an orderly end to the [Argentine] crisis the contagion will be enormous” in the rest of Latin America, Gaviria declared.

Flashback: Bush Backs IMF Austerity Measures

December 22, 2001

BBC News - US President George W Bush has urged Argentina's next leader to carry out the austerity measures proposed by the International Monetary Fund (IMF). He said if the policies were carried out, it could clear the way for Argentina to get more money from the institution.

The austerity measures have been blamed for the scenes of civil unrest in Argentina this week, as hundreds of thousands of people took to the streets to protest at economic hardship.

But President Bush defended the IMF's role in Argentina's problems.

"The IMF made some very tough but very realistic and very necessary demands on the money, and that is that the government of Argentina must restructure its fiscal policy and its tax policy," he told reporters.

In the absence of firm new policies, many creditors and investors have criticised the IMF for its role in the crisis.

IMF under fire

Hans Humes of Van Eck Emerging Market Funds and spokesman for a New York-based committee of Argentina's foreign creditors has been particularly critical of the IMF's role.

"The IMF... were instrumental in engineering this, lending an additional huge amount of money this year," he told the BBC's Today programme.

Foreign creditors expect the collapse of the government to delay a restructuring of the nation's $132bn (£91.2bn) public debt and cause a default. One rating agency said it will cost private investors half of the $97bn (£67bn) face value of their claims.

The International Monetary Fund decided two weeks ago to cut Argentina's $22bn credit line but denies it is to blame for the country's troubles.

Debt swap unlikely

Argentine President Fernando de la Rua resigned on Thursday as violence engulfed the country. The widespread riots and looting were in response to more than four years of harsh austerity policies demanded by the IMF to repay the debt.

President de la Rua was only halfway through his four-year term and quit just hours after Economy Minister Domingo Cavallo. The resignations mean the country is unlikely to be able make its planned 20 January debt swap. By swapping out of current bonds and into new low interest bearing loans, the government had hoped to cut its heavy debt servicing payments.

Senator Oscar Lamberto has been named as Argentina's provisional economy minister by the country's interim president. He was appointed by Ramon Puerta, the head of Argentina's Senate, the caretaker president. Late on Friday the Peronist party named Adolfo Rodriguez Saa to serve as interim president, until elections are held on 3 March.

IMF not totally to blame

"[The IMF] were really the last lenders to Argentina and have exacerbated the debt overhanging the country," said Mr Humes, adding the IMF should take its share of losses.

Institutional investors have also been blamed for overlending to Argentina. Steve Sjuggerad, a fund manager who says he made a lot of money out of Argentina, shipped out all of his investments in the summer. He told the BBC's World Business Report:

"International investors did lend Argentina up to $155bn and in a sense we allowed the problem to get as bad as it got."

But others aren't quite so quick to indict the international lending institution for its insistence on a workable budget and prudent fiscal policies, choosing instead to pursue a prudent course by denying aid.

"The IMF realised the current Argentine problem was a political one," says Arthur Andersen analyst Alberto Tenaillon, who is based in Buenos Aires.

"Since the [former] government was not able to get its budget approved... the IMF decided not to free certain monies Argentina was wanting," Mr Tenaillon told BBC News Online.

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