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Global Crisis/Innovation Blog

 “Desperation Rises over Debt Crises”:  It’s All a Sham!

By Shlomo Maital

US debt mountain?  $14.6 trillion?  Nope…less than $10 trillion.  

That is the headline in the Global New York Times, on the front page. Desperation. As Obama storms out of negotiations with the Republicans, again America walks to the edge, and global capital markets ponder the specter of American not able to pay for its bonds when they mature, after August 2.

   And it’s all a sham!  Because America is not even close to its legal debt ceiling of about $14.5  trillion.  In fact, it is $4.6 trillion below it!

   Here is why.   The current total public debt outstanding of the United States is approximately $14.22 trillion dollars.   Of this total, $9.6 trillion is “debt held by the public”, while the remainder (approximately $4.6 trillion) is in the form of “intragovernmental holdings”.   “Debt held by the public” is debt that has been purchased by pension funds, foreign governments, foreign investors, American investors, etc. If you buy a US savings bond, then this goes into the “debt held by the public” category.  This is real debt, owed by the U.S. govt. 

    But what are “intragovernmental holdings”?   It is “balances of Treasury securities held by over 230 individual federal government accounts with either the authority or the requirement to invest excess receipts in special US Treasury securities that are guaranteed for principal and interest by the full faith and credit of the US Government”.

   Translation: Money the U.S. govt. owes…to itself.  In other words: On a balance sheet, the liability is offset by an asset (the money that the debt was sold for). 

   According to the Government Account Office GAO:   “The majority of intragovernmental debt holdings are Government Account Series (GAS) securities. GAS securities consist of par value securities and market-based securities, with terms ranging from on demand to 30 years.”    As of September 30th, 2010, gross intragovernmental debt holdings totaled approximately $4.53 trillion.   A large majority of this intra-governmental debt (57 per cent) was held by the Social Security Administration Trust Fund, the sum of $2.399 trillion.  This is money the Federal Govt. owes to itself!   And the debt is backed by an asset – the money itself!

    So why is it included in the official legal definition of “US public debt”?  Why is it subject to the official U.S. govt. debt ceiling?  And why is this crisis over America’s debt occurring, over a hugely mistaken interpretation of what debt is? 

    If you, John Q. Public, owe $100, let’s say, and you have a $100 bill in your pocket, is your net debt $100?  Or is it zero?

   Why then is the U.S. Govt. treated differently?

  It beats me.  The whole U.S. debt ceiling crisis is a sham, a misunderstanding.

  That won’t prevent global capital markets from a major nervous breakdown, come August 2 and no agreement. 

    There is simply no end to the ways the world of finance complicates matters, to mystify innocent bystanders.  We are heading for a global crisis, because the way America’s public debt is defined is misguided, mistaken, misinterpreted and wrongheaded.

     Can someone please explain this to the Republicans? 

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Global Crisis/Innovation Blog

Euro Crisis: Italy is the REAL Problem!

By Shlomo Maital

       If  little Greece (11 m. people) and tiny Ireland (6 m. people) rattled Europe’s windows, because of their debts, Italy is about to blow up Europe’s shaky house.  Here is why.  Italy is huge (60 m. people, $2 trillion economy,  $34,000 per capita GDP), and nearly bankrupt.  Italy has the world’s third largest bond market, and its public debt is 120 per cent of GDP.  (The comparable figure for Greece was 115 per cent in 2009, but that will rise to 149 per cent, says the IMF, by 2013).  According to the Financial Times:

    “Global banks’ exposure to Italy dwarfs their exposure in the three eurozone countries that have already been bailed out – Greece, Portugal and Ireland. In fact, at $262bn, the aggregate sovereign claims of foreign banks on Italy exceed  their combined sovereign exposures to Greece, Ireland, Portugal and Spain, which total about $226bn, according to research by analysts at Collins Stewart.”

 Who holds Italian Government bonds?

    “French banks hold nearly $98bn worth of Italian sovereign debt, while Germany holds $51.2bn, according to the Bank for International Settlements. Italy is such an integral part of the financial system that most developed countries have a material exposure – Japan, for example, has a sovereign exposure of $29bn, according to Collins Stewart.  Within Italy itself, about 65 per cent of domestic banks’ own equity is exposed to the sovereign [debt], according to the Bank for International Settlements.”

In other words: Default by Italy on its bonds will bring down Italian banks, and severely shake banks in France and in Germany. 

      How close is Italy to default?  Close.  In the past few days, interest rates on Italian bonds have risen to three percentage points higher than rates on German bonds.  Why? According to The Economist, “this week’s anxiety was caused in part by a quarrel between Silvio Berlusconi, the prime minister, and Giulio Tremonti, the finance minister, and by uncertainty over the passage of an austerity budget.”  

    What a superb time for Italy’s skirt-chasing Prime Minister to quarrel with his Finance Minister.  The $68 b. budget cut passed Italy’s Parliament – but its shaky government and embattled PM bode ill. 

     While everyone watches Greece, Italy has begun a dangerous slide down the slippery slope of higher interest rates, rising risk premiums and increasing difficulty to recycle its bonds. According to one expert, if the risk premium on Italian Government bonds rises to 5 percentage points above German bunds, Italy will be bankrupt.  Right now, the gap is 3.  It is worth thinking carefully what it might mean if Italy needs a bailout. Who will bail it out?  By how much? What will be the terms?  I expect a lot of European bankers and officials are losing a lot of sleep over Italy.  Greece, in comparison, will seem like a tea party.

 

Blog entries written by Prof. Shlomo Maital

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