Thread: U.S. Risks Joining 1933 Germany in Pantheon of Deadbeat Defaults

Bloomberg
By John Glover - Oct 13, 2013 6:01 PM CT

“The only situation that really parallels the U.S. situation at present is the U.S. situation,” he said. “There’s really no doubt about the solvency of the U.S. Treasury.”

U.S. Risks Joining 1933 Germany in Pantheon of Deadbeat Defaults

Reneging on its debt obligations would make the U.S. the first major Western government to default since Nazi Germany 80 years ago.

Germany unilaterally ceased payments on long-term borrowings on May 6, 1933, three months after Adolf Hitler was installed as Chancellor. The default helped cement Hitler’s power base following years of political instability as the Weimar Republic struggled with its crushing debts.
Enlarge image U.S. Risks Joining 1933 Germany in Pantheon of Deadbeat Defaults

“These are generally catastrophic economic events,” said Professor Eugene N. White, an economics historian at Rutgers University in New Brunswick, New Jersey. “There is no happy ending.”

The debt reparations piled onto Germany, which in 1913 was the world’s third-biggest economy, sparked the hyperinflation, borrowings and political deadlock that brought the Nazis to power, and the default. It shows how excessive debt has capricious results, such as the civil war and despotism that ravaged Florence after England’s Edward III refused to pay his obligations from the city-state’s banks in 1339, and the Revolution of 1789 that followed the French Crown’s defaults in 1770 and 1788.

Failure by the world’s biggest economy to pay its debt in an interconnected, globalized world risks an array of devastating consequences that could lay waste to stock markets from Brazil to Zurich and bring the $5 trillion market in Treasury-backed loans to a halt. Borrowing costs would soar, the dollar’s role as the world’s reserve currency would be in doubt and the U.S. and world economies would risk plunging into recession -- and potentially depression.

Senate Talks

Senate leaders of both parties are negotiating to avert a U.S. default after a lapse in borrowing authority takes effect Oct. 17, even as senators block legislation to prevent one and talks between the White House and House Republicans have hit an impasse. Democratic lawmakers said Oct. 12 that the lack of movement may have an effect on financial markets. After Oct. 17, the U.S. will have $30 billion plus incoming revenue and would start missing payments sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office.
Serial Defaulter

Germany, staggering under the weight of 132 billion gold marks in war reparations and not permitted to export to the victors’ markets, was a serial defaulter from 1922, according to Albrecht Ritschl, a professor of economic history at the London School of Economics. That forced the country to borrow to pay its creditors, in what Ritschl calls a Ponzi scheme.

“Reparations were at the heart of the issue in the interwar years,” Ritschl said in a telephone interview. “The big question is why anyone lent a dime to Germany with those hanging over them. The assumption must have been that reparations would eventually go away.”

While a delinquent corporation may go out of business, be broken up, sold to a competitor, or otherwise change its shape, sovereign defaulters are different. Weimar Germany deferred payments, stopped transfers, reformed the currency and wrote down debt, wringing a series of agreements from its creditors before the Nazis repudiated the obligations in 1933.

It took until the 1953 London Debt Agreement to lay to rest the nation’s reparations difficulties, essentially by postponing any payments until after reunification in 1990 of East and West Germany, according to Timothy Guinnane, Professor of Economic History at Yale University in New Haven, Connecticut. The U.S., eager to ensure Germany was a bulwark against communism, pressured creditors to agree to debt relief, according to Guinnane.
‘Economic Strain’

“The U.S. was not being generous or magnanimous in the London Debt Agreement, it rarely is,” Guinnane said in an e-mail. “Rather, it understood that if Germany was forced to repay all the debts it technically owed, it would put the new Federal Republic under intolerable political and economic strain.”

Payments on about 150 million euros ($203 million) of bonds issued to fund reparations ended in October 2003, according to the Associated Press.

After sovereign defaults and before a nation is allowed to borrow again, some sort of repayment is typically made, Carmen Reinhart and Kenneth Rogoff wrote in their 2009 book on sovereign bankruptcies “This Time Is Different.” While Russia’s Bolshevik government refused to pay Tsarist debts, when the country re-entered debt markets it negotiated a token payment on the debt, according to the book.
Germany, France

Germany and France have both defaulted eight times since 1800, according to Reinhart and Rogoff. While Germany was sufficiently big and strategically important to be helped to peaceful prosperity by its creditors, default typically doesn’t end well for smaller nations.

Serial defaulters Argentina and Greece have retained political, if not economic independence. The Latin American nation failed to meet its commitments five times since 1951 and in 2001 gained the record for the largest-ever restructuring, a distinction it held until overtaken by Greece in 2012. Argentina’s bondholders are still pursuing the nation through the courts.

Including 2012, Greece has defaulted six times since 1826, three years before it gained independence, and has spent more than half the years since 1800 in default, according to Reinhart and Rogoff.

The biggest emerging-markets defaults in the past 15 years illustrate the cycle of contagion that typically marks sovereign debt crises.
Russian Restructuring

Russia halted payments on $40 billion of local debt in 1998 after oil, its main export, plunged 42 percent amid a global economic slowdown triggered by the Asian financial crisis. By the time it devalued the ruble and defaulted that August, the government had drained about half its foreign reserves and made an unsuccessful bid to increase the $22.6 billion international aid package it had received.

Russia’s debt restructuring prompted investors to pull out of emerging markets, plunging Argentina into recession. By December 2001, when the South American country halted payments on $95 billion of bonds, the economy had contracted three successive years, cutting into tax revenue and pushing foreign reserves down to almost a six-year low.

Those defaults took place because events had rendered the nations insolvent, something that doesn’t apply to the U.S., said the LSE’s Ritschl.

“The only situation that really parallels the U.S. situation at present is the U.S. situation,” he said. “There’s really no doubt about the solvency of the U.S. Treasury.”


http://www.bloomberg.com/news/2013-1...-defaults.html

Biggest US Foreign Creditors Show Concern on Default Risk

China and Japan, which together hold more than $2.4 trillion in U.S. Treasuries, raised pressure on the U.S. to resolve a political impasse on its debt ceiling that threatens to destabilize global financial markets.

Japan must consider the impact of any default on its bond holdings, even as the U.S. will probably avoid a fiscal crisis, Japanese Finance Minister Taro Aso said today in Tokyo. Chinese Deputy Finance Minister Zhu Guangyao said yesterday that the U.S. should prevent a default, the People’s Daily reported.

Any failure by the U.S. to honor its debt obligations would damage the dollar’s status as the world’s reserve currency. A shift in asset allocation by China, Japan or other major holders of Treasuries could push up U.S. interest rates and cause swings in global currency markets.

“If a default on U.S. debt occurs, there will be a huge impact on markets,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “In the long run, some nations could review the allocation of their foreign reserves and shift to a better-balanced portfolio.”

The warnings are being made days before finance ministers and central bankers convene in Washington for the annual meetings of the International Monetary Fund and the World Bank. The IMF said today a U.S. default could “seriously damage the global economy.”
Treasury Owners

China, the largest foreign owner of U.S. Treasuries, had $1.28 trillion worth at the end of July, followed by Japan, which held $1.14 trillion, according to the U.S. Treasury Department. China overtook Japan as the largest foreign owner of Treasuries in September 2008, with the value of its holdings surging 107 percent since then. Japan’s rose 84 percent over the same period.

“Japan must be aware that the absolute value of those debt holdings would decline” should the U.S. default, Aso said at a press conference. Nations such Japan and China that have a large proportion of dollar-denominated reserves need to think about this, he said.

“If the debt ceiling problem worsens, it would affect the world economy,” Aso said, adding “we hope this problem will be resolved without delay.”

Germany also hopes the effect of the U.S. government shutdown will be temporary and that its debt won’t be downgraded, a government official told reporters in Berlin today.
Bond Yields

Yields on Treasury three-year notes rose for a third day today as the U.S. prepares to sell $30 billion of the securities in the first auction of coupon securities since the government shutdown.

Treasury Secretary Jacob J. Lew said Congress needs to increase the debt ceiling by Oct. 17 or the nation risks defaulting on its payments. Lew is scheduled to testify before the Senate Finance Committee on Oct. 10.

Aso said he may discuss debt issues with his U.S. counterpart at a Group of 20 meeting this week.

President Barack Obama and Republicans remain locked in a fiscal stand-off. Senate Democrats are planning a test vote before the end of this week on a measure that would grant Obama authority to raise the $16.7 trillion debt ceiling, probably for a year unless two-thirds of both chambers of Congress disapprove.
Stand-off

In 2011, the last time Congress was gridlocked over the extension of the debt ceiling, the U.S. didn’t default on its debt. Republicans and Democrats reached a last-minute deal to raise the borrowing limit, though the posturing hurt consumer confidence and wiped out $6 trillion of value from global stocks.

The U.S. hasn’t defaulted since 1790, when the newly formed nation deferred until 1801 interest obligations on debt it assumed from the states, according to “This Time Is Different,” a history of financial crises by Carmen Reinhart and Kenneth Rogoff.

A default would be worse than the blow to the global economy from the collapse of Lehman Brothers Holdings Inc. in 2008, said Takatoshi Ito, the head of an expert panel advising Japan’s Government Pension Investment Fund, the world’s largest manager of retirement savings.

“I doubt we’ll see the U.S. fall into default on the 17th, but if it happened it would be worse than the Lehman shock,” Ito said last week in an interview. “I can’t imagine Japan and China would just sit there quietly taking losses on their foreign reserves.”
Dismissing Default

Pacific Investment Management Co. Co-Chief Investment Officer Bill Gross and BlackRock Inc. Chairman and Chief Executive Officer Laurence D. Fink, who oversee $5.76 trillion, dismiss the possibility of a default.

The $12 trillion of outstanding U.S. government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008. The U.S. Federal Reserve is the biggest single holder of Treasuries, with $2.1 trillion worth as of Oct. 2.

Japan’s foreign exchange reserves were $1.21 trillion at the end of September, and China had $3.50 trillion in reserves at the end of June.

South Korea, Asia’s fourth-largest economy, pared the share of dollars in its foreign-exchange reserves 57.3 percent at the end of 2012 from 60.5 percent a year earlier, the central bank said in March. The nation had a record $337 billion in reserves as of the end of September.

http://www.bloomberg.com/news/2013-1...ves-value.html

Economist Caution: Prepare For 'Massive Wealth Destruction'

Sunday, 13 Oct 2013 07:35 AM

That’s exactly what many well-respected economists, billionaires, and noted authors are telling you to do — experts such as Marc Faber, Peter Schiff, Donald Trump, and Robert Wiedemer. According to them, we are on the verge of another recession, and this one will be far worse than what we experienced during the last financial crisis.

Marc Faber, the noted Swiss economist and investor, has voiced his concerns for the U.S. economy numerous times during recent media appearances, stating, “I think somewhere down the line we will have a massive wealth destruction. I would say that well-to-do people may lose up to 50 percent of their total wealth.”

When he was asked what sort of odds he put on a global recession happening, the economist famous for his ominous predictions quickly answered . . . “100 percent.”

Faber points out that this bleak outlook stems directly from Federal Reserve Chairman Ben Bernanke’s policy decisions, and the continuous printing of new money, referred to as “quantitative easing” in the media.

Faber’s pessimism is matched by well-respected economist and investor Peter Schiff, the CEO of Euro Pacific Capital. Schiff remarks that the stock market collapse we experienced in 2008 “wasn’t the real crash. The real crash is coming.”

Schiff didn’t stop there. Most alarming is his belief that daily life will get dramatically worse for U.S. citizens.

“If we keep doing this policy of stimulus and growing government, it’s just going to get worse for the average American. Our standard of living is going to fall . . . People who are expecting Social Security can’t get all that money. People expecting government pensions can’t get all their money . . . We simply can’t afford to pay them.”

Equally critical of the current government and our nation’s economy is real estate mogul and entrepreneur Donald Trump, who is warning that the United States could soon become a large-scale Spain or Greece, teetering on the edge of financial ruin.

Trump doesn’t hesitate to point out America’s unhealthy dependence on China. “When you’re not rich, you have to go out and borrow money. We’re borrowing from the Chinese and others.”

It is this massive debt that worries Trump the most.

“We are going up to $16 trillion [in debt] very soon, and it’s going to be a lot higher than that before he gets finished,” Trump says, referring to President Barack Obama. “When you have [debt] in the $21-$22 trillion [range], you are talking about a [credit] downgrade no matter how you cut it.”

In a recent appearance, Trump went to so far as to say the dollar is “going to hell.”

Where Trump, Faber, and Schiff see rising debt, a falling dollar, and a plunging stock market, investment adviser and author Robert Wiedemer sees much more widespread economic destruction.

In a recent interview to talk about his New York Times best-seller Aftershock, Wiedemer says, “The data is clear, 50 percent unemployment, a 90 percent stock market drop, and 100 percent annual inflation… starting in 2013.”

Before you dismiss Wiedemer’s claims as impossible or unrealistic, consider this: In 2006, Wiedemer and a team of economists accurately predicted the collapse of the U.S. housing market, equity markets, and consumer spending that almost sank the United States. They published their research in the book America’s Bubble Economy.

When the interview host questioned Wiedemer’s latest data, the author unapologetically displayed shocking charts backing up his allegations, and then ended his argument with, “You see, the medicine will become the poison.”

The interview has become a wake-up call for those unprepared (or unwilling) to acknowledge an ugly truth: The country’s financial “rescue” devised in Washington has failed miserably.

The blame lies squarely on those whose job it was to avoid the exact situation we find ourselves in, including Bernanke and former Fed Chairman Alan Greenspan, tasked with preventing financial meltdowns and keeping the nation’s economy strong through monetary and credit policies.

At one point, Wiedemer even calls out Bernanke, saying that his “money from heaven will be the path to hell.”

But it’s not just the grim predictions that are causing the sensation in Wiedemer’s video interview. Rather, it’s his comprehensive blueprint for economic survival that’s really commanding global attention.

The interview offers realistic, step-by-step solutions that the average hard-working American can easily follow.

The video was initially screened for a relatively small, private audience. But the overwhelming amount of feedback from viewers who felt the interview should be widely publicized came with consequences, as various online networks repeatedly shut it down and affiliates refused to house the content.

Bernanke and Greenspan certainly would not support Wiedemer publicly, and it soon became apparent mainstream media would not either.

“People were sitting up and taking notice, and they begged us to make the interview public so they could easily share it,” said Newsmax Financial Publisher Aaron DeHoog. “But unfortunately, it kept getting pulled.”

“Our real concern,” DeHoog added, “is the effect even if only half of Wiedemer’s predictions come true.

“That’s a scary thought for sure. But we want the average American to be prepared, and that is why we will continue to push this video to as many outlets as we can. We want the word to spread.”

http://www.moneynews.com/MKTNews/Mas...source=taboola

http://www.alipac.us/f9/scare-obama-...6/#post1373029

Lew: Medicare, Social Security, military checks first on chopping block if debt deadline missed

Published October 10, 2013
FoxNews.com

Treasury Secretary Jacob Lew delivered a stern warning to Congress on Thursday about the consequences of not raising the debt ceiling, saying Social Security checks and benefits for veterans are among the payments that could be halted in such a scenario.

Lew testified Thursday before the Senate Finance Committee. He spoke amid claims from some corners that missing the Oct. 17 deadline does not necessarily trigger the doomsday scenario of default on the debt.

Lew also did not go so far as to claim payments on the debt would be jeopardized after Oct. 17. However, he said myriad other payments inevitably would be -- which he described as a "default" in the general sense.

"Under any scenario, we will be defaulting on obligations," Lew said.
Lew, in a written statement, warned that upcoming payments for the following could all be jeopardized before Nov. 1:

• Social Security payments
• Medicare payments
• Veteran benefit payments
• Active-duty military salaries

"The United States should not be put in a position of making such perilous choices for our economy and our citizens," Lew said.

Lew said missing that deadline would cause financial chaos, hurting the economy and shaking the financial markets to a degree that could cripple the economic recovery. He urged Congress to promptly raise the debt ceiling and pass a spending bill to restore confidence.

The appearance was yet another public restatement of the administration's stance that Congress needs to pass a spending bill and lift the U.S. borrowing cap before President Obama will negotiate over the nation's budget ills.

Sen. Orrin Hatch, R-Utah, though, argued that the nation's overspending needs to be dealt with, and he bristled at Obama's repeated claims that the debt ceiling should be raised to pay for spending Congress racked up. "It is a problem that all of us ... need to deal with," Hatch said.

He also said it is "disconcerting" to hear Social Security and other payments could be stopped.

In a glimmer of hope for a possible deal, some Republicans are discussing the possibility of permitting a short-term increase in the debt ceiling to allow for further negotiations. Obama is hosting top House Republicans on Thursday afternoon to discuss the impasse, which so far has resulted in a partial government shutdown.

The next big deadline is Oct. 17, when the Treasury Department says the government will exhaust ways to pay all its bills without an increase in the debt ceiling.

Credit-rating agency Moody's, though, released an analysis on Wednesday that claimed even if the government missed that deadline, a default on the debt would not happen. Moody's argues that the Treasury Department would find a way to pay interest on its debt above all else.

"We believe the government would continue to pay interest and principal on its debt, even in the event that the debt limit is not raised, leaving its creditworthiness intact," the analysis said. "The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury's extraordinary measures to raise funds) and a default."

The analysis also noted that the next interest payment -- of $5.9 billion -- is not due until the end of the month.

Still, few would claim that the implications of not raising the debt ceiling are minor. Even if the government can pay interest on the debt, it would be unable to pay myriad other obligations -- officials say the government would have to choose between priorities like Social Security checks and many other functions of the federal government.

The uncertainty could severely damage the economy and shake the financial markets.

Some officials argue, though, that since this is uncharted territory it's ultimately unclear whether the Treasury Department could prioritize payments -- and that a default on debt is a possibility.

"A default would be a financial heart attack," Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, said Thursday.

Lew on Thursday also questioned his ability to prioritize payments.

http://www.foxnews.com/politics/2013...mty_twitter_fn