Is the American Government lying about the debt crisis?

Written by Martin D. Weiss, Ph.D. of “Money and Markets” eletter@e.moneyandmarkets.com

Do you believe what government officials and experts are saying about the debt crisis?

If so, you’re taking your financial life into your hands.

Just consider how many times they’ve been wrong,

issued deliberately misleading statements, or simply lied:

In 2007, they swore on a stack of Bibles that the debt crisis

was limited to sub-prime mortgages.

 

But the crisis promptly spread to all kinds of mortgages,

ripping through giant mortgage lenders like Countrywide,

Fannie Mae, and Freddie Mac.

In 2008, they admitted it had spread,

but swore that it was strictly contained to the housing and mortgage sector.

But in a few short months, it had enveloped commercial paper,

money markets, and nearly all of Wall Street.

Nearly every one ofAmerica’s largest banks either failed

or came within a hair of insolvency.

 

In late 2009, they rescued the bankrupt banks and mortgage lenders

using the $700 billion in emergency capital approved

under the Trouble Asset Relief Program (TARP).

Then, they ran deliberately lenient “stress tests”

on the biggest banks to “prove” to the public

that the emergency had passed.

 

But with the government now assuming liability for trillions of mortgages

and other bank obligations,

they transformed a Wall Street debt disaster

into an even largerWashingtondebt disaster:

The federal deficit ballooned to four times its pre-crisis size.

And in the euro zone,

where governments had also pumped massive sums into bankrupt banks,

the weakest countries likeGreecebegan to collapse.

In 2010, the European Union and the International Monetary Fund

put together a sovereign debt rescue package

that was even larger than TARP.

They pulledGreecefrom the precipice and

vowed never to let the contagion reel out of control.

 

But within a few short months,

the contagion toppledIrelandandPortugal

threatened a similar fate forSpain,Italy, andBelgium,

and even raised serious questions about the financial fate

of the two largest economies in the euro zone -FranceandGermany.

 

Clearly, each outbreak of the contagion, each government rescue,

and each new happy-talk pronouncement

has merely spawned a bigger disaster, impacting bigger institutions.

Has gutted the portfolios of more investors,

and ruining the lives of millions more Americans.

Now, here we are halfway into 2011 and they’re at it again.

This time with a complete package of misleading statements

and lies that make all previous ones seem candid by comparison.

 

Lie #1. They’re again saying that the debt crisis of 2008-09 is “history.”

 

The truth: The core cause of the crisis —

the gigantic pyramid of high-risk derivatives —

has never gone away.

 

Quite the contrary, the pile-up of derivatives on the books

of majorU.S.banks is now much larger — $244 trillion,

compared to less than $200 trillion before the debt crisis,

according to the U.S. Comptroller of the Currency (OCC).

 

Lie #2. They say thatAmerica’s largest banks have virtually no exposure

to a Greek debt default or a broader European sovereign debt crisis.

 

The truth: All major European andU.S. banks are linked through an even larger global network of derivatives,

now representing more than $600 trillion,

according to the Bank of International Settlements.

 

Therefore, even thoughU.S.banks may not hold large amounts

of European debts themselves,

they are directly exposed to European banks

that do hold large amounts of loans to

Greece,Ireland,Portugal, and others in jeopardy.

 

 

Lie #3. They insist thatAmerica’s largest banks are safe.

 

The truth: The largestU.S. banks continue to hold

nearly all of the derivatives in the country.

Goldman Sachs has $44.9 trillion in derivatives.

Bank of America has $52.5 trillion.

Citibank has $54.1 trillion.

And JPMorgan Chase towers over all others with $79.5 trillion

of these potentially dangerous investments.

 

In total, JPMorgan, Goldman, Citibank, and the BofA alone are exposed to $234.7 trillion in derivatives.

In contrast, among the thousands of other U.S.banks, the grand total of derivatives is a meagre $9.3 trillion.

In other words, these four banks are exposed to more than 25 times

the sum total of all derivatives held by every other bank in theUnited States.

Never before has so much financial power — and risk — been concentrated in the hands of so few!

Yes, these numbers, reflecting the “notional” value

of the financial instruments at play,

are far larger than the actual amounts invested.

But still, the risks are huge …

The derivatives held by Bank of America are

36 times larger than TOTAL assets;

 

At JPMorgan Chase, they’re 46.1 times larger than the assets;

 

At Citibank, 46.6 times larger; and

 

At Goldman Sachs Bank, a shocking 533 times larger!

Yes, in recent months,

some banks have reduced somewhat their exposure to defaults

by their counterparties.

But here again, the exposure remains massive:

According to the OCC, for each dollar of capital …

Bank of America has $1.82 in credit exposure to derivatives;

 

Citibank also has $1.82;

 

JPMorgan Chase has $2.75; and

 

Goldman Sachs is, again, at the greatest risk of all —

with $7.81 in credit exposure for each dollar of capital.

 

That means that if JPMorgan’s counterparties defaulted on 36% of their derivatives, every last dime of the company’s capital would be wiped out.

And at Goldman Sachs,

defaults on just 13% of its derivatives would wipe out its capital.

 

Lie #4. Misinformation about the government’s supersized debts is equally egregious.

They want you to believe that, although large,

the government’s debts are far below the danger zone —

thought to be around 100% ofGDP.

 

The truth: According to the Fed’s latest Flow of Funds report, the U.S. Treasury owes a total of $9.6 trillion, 64% ofGDP, which isn’t too bad.

But the U.S.government is also responsible for $7.6 trillion in debts

owed by government agencies, such as Fannie Mae and Freddie Mac.

The U.S.government’s total debt burden: $17.2 trillion

or 115% of GDP—

similar or WORSE than that of countries like

Greece, Ireland, Portugal, and Spain!

 

Lie #5. They argue thatAmerica is special because it controls the world’s dominant reserve currency.

The truth: Yes, that givesWashington the ability to print money with impunity … press other rich countries to accept its debts,

and borrow huge amounts abroad to finance its deficits.

But it’s more of a curse than a blessing!

 

It means that, more so than any other major nation,

theU.S.government is beholden to investors overseas —

often the same investors who have repeatedly attacked countries

like Greece and Ireland.

Ultimately, that could make the  U.S.even more vulnerable than Europe.

The 4 major Banks exposed.

 

Now the question is, what do you think?

The debate is Australia is often confused by Slogans that Politicians pump out, to gloss over the truth,

and to make you to think everything is not OK,

except if things where handled their way they would fix it.

And the problem would go away. That is far too simple.

The truth of the matter is far more complex than that.

And while facts presented here are correct,

does it actually mean the USA economy is at risk?

Well to clarify the issues you really need to understand how “Hedge” markets operate, and what is the size of the overall world market? And which other institutions share the risk? Or how they mitigate it?

 

The role of the Hedge market is actually to mitigate risk, not create risk.

Certainly there are speculators playing in the market, and spikes in the market soon show if interest in a particular area is out of proportion with the rest of the market. To rely on regulators and Government authorities to manage or monitor excesses in this market is extremely difficult. You need to assess this whole complex area with a clear mind, and measure the potentiality of any risk that could cause this market area to implode.

Complex yes but not outside a reasoned explanation that would reduce the level of anxiety that the tenor of this article creates.

 Tell me what you think? 

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2 Responses to “Is the American Government lying about the debt crisis?”

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  2. european debt crisis Says:

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