OpEdNews - Article: The American Empire Ends Today

Today, May 15 2011, is the day the Palestinians commemorate the 63th anniversary of Nakba, the catastrophe that stripped them of their land and made them refugees, slaves, and terrorist in the eyes of the world. It is the 63th anniversary of the declaration of an independent Israel.

It is also the critical turning point for the rest of the world. You may not feel it. This morning, when you woke up, the sun may have been shining through your windows. Birds were singing. Everything felt quite ordinary, and your coffee tasted just as great as usually.

But everything is going to change, and it's going to change right now. It's T minus X and counting.

What's the panic?

Well, it is the underreported story of the century, so far. It is complex and difficult to understand, but I know that anybody who reads this blog must be extraordinarly gifted and tenacious, so I will explain what's up.

The US public debt has grown to a size, where it is about to hit the debt ceiling. For a month the US Congress has been locked in a stale-mate over a bill to raise the debt ceiling, a proposal widely considered a must-pass.

"OECD calculations say that for every percentage point of Chinese growth 16 million people are helped out of poverty in the developing world."

Nonetheless, the Republican opposition has called for severe austerity measures along the lines of recent IMF recommendations to curb a pending economic depression. They want the issue resolved before agreeing to raising the debt ceiling.

"The U.S. has a lot of credibility. This does not imply their credibility can last forever," IMF fiscal affairs director Carlo Cottarelli said as he released the IMF study. It concluded that the United States is falling behind on a promise it made to other top economic countries to halve its budget deficit by 2013.

That crisis is less acute than current crisis, which forms over the inability of Congress to reach a consensus regarding the bill to raise the debt ceiling.

Hitting the debt ceiling has the approximate effect of US defaulting on its loans, an unprecedented event in history.

The debt ceiling is about to be hit. The date given by US Treasury Secretary Timothy Geithner on April 4, 2011, is "no later than May 16", a date that should have put pressure on Congress to avoid a default. It is tomorrow, when Congress reconvenes to debate the debt ceiling measure in the 59th minute of the 11th hour.

"...curbing this crisis is a question of whether it unfolds on a vast and rapid scale with unforeseeable consequences on economy and politics, as the two spheres collide and mingle, and whether it unfolds slowly and gradually."

If the debt ceiling is not increased by May 16 the Treasury has authority to take extraordinary measures to temporarily postpone the date the United States would default on its obligations, but with a time limit of eight weeks and "no headroom" to borrow within the limit after July 8, 2011.

The Consequences of US Default

The consequences of a US default are literally unfathomable. The crisis that will ripple through the financial markets is described as "1000 times worse" than the sup-prime mortgage crisis in 2008 and the following recession by ABC journalist, Jake Tapper.

"Imagine the financial crisis we've just seen two years ago, 1000 times worse... It's a scenario we have never really bothered to look at... It would leave the financial system in a situation that is functionally unimaginable."

Almost a month ago, on April 17, Geithner assured the world that Congress would display due diligence on the matter:

Treasury Secretary Timothy Geithner says Republicans are assuring the administration that they will pass an increase in the government's borrowing limit in time to prevent an unprecedented default on the nation's debt. Geithner tells NBC's "Meet the Press" that Republicans gave this assurance to President Barack Obama at a White House meeting last Wednesday. Geithner says Republican leaders told Obama that they recognized that they couldn't play around with the government's credit rating and he's confident Congress will act in time.

Instead we've witnessed how partisan bickering has led USA down a very dangerous road, which already in the preliminary stages may have severe effects on the economy.

"...the ability to conduct economic warfare without triggering enmity, rests on a number of factors, namely equilibrium, equanimity and equity between the opponents."

Republicans have tried to pressure the Democratic administation into giving concessions on budget cuts on US entitlements, healthcare and pension, and the partisan split has been so severe that there's been talk of a possible government shutdown. Government shutdown is not in itself as catastrophic as it may sound. It just means that all non-essential government functions are shut down, until Congress can reach an agreement.

Dumping US Treasury Security

Shutdown may affect a lot of US citizens, but it doesn't necessarily send the world spinning into economic crisis.

However, because it is a part of a devastating default scenario, financial experts have expressed concerns that dragging out the bill to raise the debt ceiling will, in itself, cause damage to the system:

a default by the U.S. Treasury, or even an extended delay in raising the debt ceiling, could lead to a downgrade of the U.S. sovereign credit rating.

That's the minor part of the problem, really. It is a problem in itself, but it is nothing in comparison to the dumping of US Treasury Bonds. Foreign investors, namely China, Japan and South Korea, hold nearly half of the outstanding US Treasury debt.

The Washington budget is dependent on its credit rating, which defines its ability to take up loans, and on the willingness of foreign investors to hold what could quickly become toxic assets.

"...foreign investors (...) could reduce their purchases of Treasuries on a permanent basis, and potentially even sell some of their existing holdings.

Those are the words of Matthew E. Zames, a managing director at JPMorgan Chase and the chairman of the Treasury Borrowing Advisory Committee, which meets quarterly with the Treasury Department.

The projected dumping of purchases of Treasuries is far from as theoretical as it is put in the diplomatic letter to Secretary of the Department of Treasury, Timothy Geithner, on April 25, 2011. It is what will most definitely occur, if US defaults.

"It is exactly similar to the sub-prime mortgage crisis, except on a much wider scale, encompassing the entire American household, the federal government."

The Same Pattern as in 2008, Only Worse

As a consequence the run on money market funds would trigger "a severe crisis, disrupting markets and ultimately necessitating the same kind of backstops that Treasury and the Federal Reserve initiated in the aftermath of the 2008 crisis", as it is put by Matthew E. Zames in his step-by-step breakdown of the crisis scenario unfolding.

I say unfolding, because curbing this crisis is a question of whether it unfolds on a vast and rapid scale with unforeseeable consequences on economy and politics, as the two spheres collide and mingle, and whether it unfolds slowly and gradually.

Whatever the case may be the decline of the US economy is pretty much a fait accompli.

Another bail-out measure would increase the negative rating from investors, downgrade the dollar as reserve currency, and initiate a mass transition to an alternative reserve currency - which has already taken place locally between Russia and China in November 2010, where they began using their domestic currencies for bilateral trade.

US Treasuries have historically been viewed as the world's safest asset. They are the most widely-used collateral in the world and underpin large parts of the financing markets.

Companies would be driven to deleveraging, and many would default. It's the same scenario as 2008, except on a wider scale and with more irreperable damage to the US economy.

The General US Debt, Credit Problem

So, common sense would be to raise the debt ceiling, and forego further stalling from mixing it in with the austerity measures, but even that doesn't remove the problem. It just pushes it two years ahead in time.

U.S. federal budget deficit reached 1.29 trillion dollars in the fiscal year 2010, and according to President Obama's fiscal year 2012 budget, the federal deficit in 2011 is expected to hit a new record of 1.65 trillion dollars.

"Whatever the case may be the decline of the US economy is pretty much a fait accompli."

Compare it to a private household: You effectively borrow money to pay off debt. That's called a debt carousel. At some point creditors are going to grow wise to it and stop lending you. At that point your collective debt with interest rates begin to choke you.

It's not entirely the same: The US treasuries are guarantees for loans that are not expected to be paid back, but expected to be tradeable. China is already concerned, because if US treasuries drop they have invested over a trillion dollars that may be only half of that on the market.