by Maurizio d’Orlando

Asian nations, China and India first, are no longer willing to purchase securities issued by the US Treasury, which this year has about US$ two trillion short-term debt to refinance. Beijing is buying gold instead.

For at least four years, AsiaNews has sounded the alarm bells against the risks due to the huge size reached by speculative finance[1]. In 2008, we said that the attempt to save US banks could push the US debt beyond the point of solvency (see Maurizio d’Orlando, “US debt approaches insolvency . . .,” in AsiaNews 19 December 2008).

Back them it could appear a bit overblown, but now even US Federal Reserve Chairman Ben S Bernanke is warning the US Congress about the danger. In a statement before the House Financial Services Committee, he said that the US public debt might no longer be sustainable very soon.

Financial jargon aside, the subtitle of an article by The Washington Times—Stage is set in U.S. for a Greek tragedy—says it all. Interviewed for the article, Bernanke says the United States is likely to face a debt crisis like the one in Greece sooner than later, “not something that is 10 years away”.

In 2008, the size of the debt was such that it was quite clear that it was not sustainable. Now we have a timeframe to measure the likelihood of insolvency for the US public debt, and it is this year. The reason for that is described in an article whose title needs no explanation: “The bankruptcy of the United States is now certain”.

The abyss of debt

By the end of 2010, the US Treasury will have to refinance US$ 2 trillion in short-term debt, plus additional deficit spending for this year, estimated to be around US$ 1.5 trillion (US$ 1.6 trillion today two months after the original article was published). Together, the US Treasury will need to borrow US$ 3.5 trillion (US$ 3.6 according to this writer) in just one year.

In 1999, two well-known economists—Alan Greenspan and Pablo Guidotti—published a formula in an academic paper. Kept secret for a long time, it is designed to predict with precision when a country’s public debt will lead it to be insolvent. Called the Greenspan-Guidotti rule, it says that to avoid a default, countries should maintain hard currency reserves equal to at least 100 per cent of their short-term foreign debt maturities.

According to the author, the United States holds 8,133.5 metric tonnes of gold (the world’s largest holder). At November 2009 dollar values, that is about U$ 300 billion. The US strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that is roughly US$ 58 billion worth of oil. According to the IMF, the US has US$ 136 billion in foreign currency reserves. Altogether, that is some US$ 500 billion in reserves (US$ 455.5 billion according to AsiaNews).

Foreigners hold 44 per cent of US$ two trillion short-term US debt; that is US$ 880 billion. Total domestic savings in the United States are only around US$ 600 billion annually. If the United States needs to sell US$ 3.5 trillion (or US$ 3.6 trillion) in Treasury bills, and all domestic savings combined are put into US Treasury debt, the United States will still fall short by nearly US$ 3 trillion. Where is the rest of the money going to come from?

China’s gold

Not China, nor India or any other Asian countries. Last year, China has in fact proportionately reduced its holdings in US Treasury bills in relation to rest of its reserves.

Recently, the International Monetary Fund (IMF) put up 191.3 tonnes of gold for sale. Some analysts had earlier suggested that China might be interested in buying it. Assets in dollars are estimated to represent over 70 per cent of China’s US$ 2.4 trillion foreign exchange reserves. As of April 2009, China held 1,054 tonnes of gold or 1.2 per cent of its GDP. That falls well below the world average. Indeed, gold represents less than 10 per cent of China’s total reserves.

According to the China Daily, a semi-official mouthpiece for the Communist Party of China, China is not likely to buy IMF gold because it might upset the market. However, some Chinese commentators believe that Beijing should increase its gold reserves to 1,800. Sources told AsiaNews that China’s real goal is 4,000 tonnes.

The same is true for other Asian countries. For instance, India, Mauritius and Sri Lanka have bought 212 tonnes sold by the IMF.

As for Japan, it is likely to continue avoiding open confrontation with the United States; but the real intentions of its top financial circles might be inferred from a mysterious and unsolved incident that occurred last summer when two officials from Japan’s central bank were caught at the Italian-Swiss border town of Chiasso carrying US Treasury bills with a nominal value of US$ 134.5 billion.

Since 1945, the US dollar has been the main international reserve currency. In theory, this gave the US Federal Reserve the power to issue debt securities at will, with the value of international trading assets. However, the Greenspan-Guidotti rule restricts this power.

Whenever US insolvency becomes self-evident, no one dare say they did not know. The Greenspan who came up with the aforementioned formula is the same Alan Greenspan who chaired the Federal Reserve for 18 years and allowed speculative. i.e. “structured” finance to expand (based on poorly tested mathematical algorithms).

This is the same Greenspan who in 1977 wrote a prophetic PhD dissertation (which was removed from his university at his request in 1987, when he became Fed chairman) on how financial bubbles develop in real estate and then burst. Not only was Greenspan aware of it, but so were US top financial circles. In other periods of history, this could lead to accusations of “treason”, but today our sense of personal and collective responsibility is more faded and faint than before. Alternatively, perhaps, there is a level of ultimate responsibility that is darker and runs deeper that the guilt of any one individual.

  • Share/Bookmark