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On 30 October 1938, the American Radio Drama series Mercury Theatre aired "The War of the Worlds", directed by Orson Welles. Adapted from H.G. Welles’ novel, the first half of the broadcast was scripted as a series of dramatic news bulletins of a Martian invasion. Listeners who had missed or ignored the opening credits assumed that the invasion was real. People fled their homes in panic. Phone calls swamped police. Today the financial equivalent of this broadcast would be the announcement: "we interrupt regular programming to announce that the United States of America has defaulted on its debt!"

Default entails failure to honour contractual obligations; in the case of debt, non-payment of interest or principal payments due to the lender. The financial impact of default is the loss suffered by the lender.

Lenders to the United States government have suffered significant losses .The losses have not been from non-payment but because repayments have been in a constantly debased currency – the dollar.

Assume a Japanese investor bought 30 year US Treasury bond in 1985 when the US$/ yen exchange rate was US$1 = Yen 250. Based on a current exchange rate of US$1 = Yen 105, the investor has lost 58% of the investment. The investor can take comfort that at the low of US$1=Yen 84, the investor would have lost 66%. European investors who bought US government bonds in recent years would have also suffered significant losses. Based on the highest US$/ Euro exchange rate (Euro1 = US$ 0.85) and the current trading levels (Euro1 = US$ 1.56), the investor would have lost (up to) 46%.

Given that in a typical sovereign default the investor loses 50% to 80% of the value of the investment, the losses suffered are not far short of default. Despite "strong dollar" official policies, a case can be made that the US is in the process of defaulting on its obligations via a systematic devaluation of its currency. The problems of the US are evident in a number of other indicators.

The US national debt as of March 2008 stands at US$9.4 trillion (that’s 12 zeros to the right of the decimal). This equates to over US$30,000 per person in the U.S. population or a little over US$60,000 per head of the U.S. working population. The US national debt has grown by US$3 trillion (50%) since 2000, when it was $6 trillion. In 2007 alone, it grew by $500 billion, from $8.7 to $9.2 trillion. In 2005, it was 67% of U.S. GDP, up from 51% in 1988. The Office of Management and Budget projects that total debt will rise to $12.3 trillion in 2013.

Of the US$4.7 trillion in private hands, US$ 2.4 trillion (51%) is held by foreign investors. Japan holds around US$600 billion (24%) and China holds US$500 billion (around 20%). U.K., Brazil and the oil exporting countries own about 6%. Middle East and Russian holdings may be higher as Belgium, Caribbean Banking Centers and Luxembourg (8%) may be vehicles for investments by oil-exporting countries wishing to avoid disclosure. As James Fallow writing in The Atlantic noted: "every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China."

The debt figures also do not include "off-balance sheet" liabilities - the US$5 trillion plus in debt and guarantees of the government sponsored enterprises ("GSE") - Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation)- that is supported by modest levels of capital (about US$81 billion). In July 2008 these obligations became de facto part of US national debt with astonishing speed. Any problem with the solvency of either institution may have implications of the AAA credit rating of the US.

US national debt is also shortening in maturity.

A fantastic article and well worth a read.

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  • 396 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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