America Taking the 2 Steps Which Lead to Bankruptcy → Washingtons Blog
America Taking the 2 Steps Which Lead to Bankruptcy - Washingtons Blog

Monday, November 17, 2008

America Taking the 2 Steps Which Lead to Bankruptcy

Companies go bankrupt when they:

(1) Borrow more than they should; and

(2) Have to pay their creditors more and more interest to loan them money.

Borrowing Too Much

Everyone knows that the U.S. has borrowed too much. As of a year ago, the financial obligations of the U.S. were some $56 trillion dollars. That number has gone way up since then.

Higher and Higher Interest Rates

America is already paying more to borrow money.

An article from Barrons entitled "Is Uncle Sam's Credit Line Running Out?" points out:
What happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?


"Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.

It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper.
In other words, buyers of U.S. treasury bonds are demanding a lot of interest to make long-term loans to Uncle Sam.

Barrons goes on to point out the credit default swaps tell the same story:
The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit-default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.


Charts of the yield curve and the spread on U.S. Treasury CDS paint a dramatic picture. Both the yield spread and the cost of insuring debt moved up sharply together starting in September. . . . Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. . . . All of which suggests America's credit line has its limits.
Like every company which borrowed too much and then got destroyed by higher and higher borrowing costs, America is following the recipe for bankruptcy.

Of course, if a company makes something that people want, that will increase the chance that it will survive and avoid bankruptcy. America has abandoned its manufacturing base, and is selling "exotic financial products" which the world is starting to realize are nothing but snake oil.

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