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Do not give in to Evil, but proceed ever more boldly against it

Monday, July 28, 2008

Living in an Imperial World: "We interrupt regular programming to announce that the United States of America has defaulted …"

Satyajit Das, author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives, is one of the world's foremost experts on derivatives and other complex financial issues.

Last week, he wrote a two-part column (Part 1 and Part 2) which begins:

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...

Take the time to read and digest both columns.

Then help others in your circle to understand what is coming so that they can help with food storage, among other things.

Tempus fugit.


Blogger Rivrdog said...

Go read Brick Oven Bill's post on the misfortunes of the National Australian Bank, which is having to write down 55% of an investment in US mortgage paper.

Then go read MY post today which explains why this is very bad news (or good news, if you look forward to TEOTWAWKI).


July 29, 2008 at 1:00 AM  
Blogger Concerned American said...

Posts referenced by George:

Brick Oven Bill


July 29, 2008 at 2:27 AM  

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