“… {The National Inflation Association} believes that a AAA rating should be reserved for countries that have budget surpluses, low levels of debt that could easily be paid off without printing money, and low levels of inflation. The U.S. had a cash budget deficit last year of $1.3 trillion, but once you include increases to unfunded liabilities, our real budget deficit was approximately $5 trillion. Even if Americans were taxed 100% of their income it wouldn't be enough to balance the budget.
It is hard to imagine a fiscal situation worse than this, but the credit ratings agencies have justified giving the U.S. a AAA rating based on the dollar's status as the world's reserve currency and the Federal Reserve's ability to monetize our deficits and debts by printing money. If it wasn't for our printing press and the world's willingness to accept and hoard the dollars we print in return for the real products and commodities they produce, the U.S. credit rating would be junk. …”
Billy T comment: It is an exaggeration to treat future obligations the same as current difference between expenditures and income, for two reasons: (1) These obligations are government created and can be government changed (and will be as in their present form they cannot be supported by the population paying taxes when they fall due). (2)It totally ignores the future income. Consider an individual instead of a government: If he earns $60,000/ year for 40 years and pays 15% taxes his future tax obligation is 2.4E6 x 0.15 = $360,000 or six times his total annual income, but ignoring his or the government’s income and focusing only on their future obligations, is silly bookkeeping.
Also, it is at least premature to suggest that US Treasury paper should be “junk rated” even if the dollar ceased to be the unique reserve currency. – The English pound held that position until WWII, and England, with its serious austerity program, is AAA rated by S&P and likely to remain AAA for some years more; however if the Chinese Yuan were available as an alternative for international reserve held by central banks, then the Yuan would be the clear preference, especially if backed by gold, as I suggested it will be here:
"... {China} recently announced an increase in its official gold reserves, it said the total had catapulted by 76% since 2002, reaching 1,054 tons. China accomplished this without a single purchase on global bullion markets. How? By quietly becoming the world's largest gold producer, then buying up all that it produced. ..." Quote from:
http://moneymorning.com/2010/02/09/copper-new-gold/
{6Aug11 insert: China is now also buying gold. –Is now the world’s largest buyer having bumped India down to second place. This rapid building up of a huge gold store, both by production and buying, makes me think my speculation made a two years ago and repeated below is 100% correct.}
Billy T comment: So long as China, the world's largest gold producer for past three years, does not sell any on the open market, there may be developing more demand for than supply of gold. China is very nervous (for good reason) about her reserves in dollars, so has no reasons to sell gold for dollars. I would think China will sell none for at least a decade more.
I speculated nearly a year ago that China may back the Yuan with gold, but only for any central bank, not for individuals. Perhaps a value between 5000 to 10,000 yuan = one oz of Au.
This would instantaneously make the Yuan an international currency, more desired than the dollar. Few central banks would actually convert Yuan into gold. (They do not now convert dollars into gold, for the same reason - i.e. deposits of currency or purchased bonds earn interest and gold is an expense to store.) The fact that the yuan was "good as gold" would make every nation prefer it to dollars for their reserves. Presumably the central banks could then sell some gold to individuals / the open market / but there already are mutually agreed restrictions on how much of the gold in their reserves central banks can sell annually.
Note also, in addition to buying minerals, energy under long term contracts to diversify her reserves, China has also is significantly buying shares of stocks. In 2009 China bought 9.63 billion dollars worth, 3.5 of that in Teck Resources - a firm I know nothing about. Perhaps they can help China dominate some field? …{6Aug11 insert: Currently China is buying firms with expertise in horizontal drilling for natural gas as like the US, China has vast stores of rock trapped gas. I am again reminded of Karl Marx’s definition of a “Capitalist” - One who will sell you the rope with which to hang him.}
From:
http://www.sciforums.com/showpost.php?p=2475063&postcount=55 Post 55 in this thread made on 2/9/10 but same idea posted a year earlier in another thread.
Almost everyone believes China has no choice but to buy US bonds and that ugly as it is, the dollar is the least ugly currency available as a “safe haven” and for international reserves. Both facts are true for a few years more, but that can and will change, almost overnight, when China wants it to. China’s process of converting to a domestic market and exporting mainly to its Asian suppliers of subcomponents it installs in its higher value added products is still incomplete. China needs to spend down more of the dollars in its reserves, with even more “paid up front” contracts for up to 30 years future delivery of raw material it needs. Thus, China is not yet ready to destroy the dollar as the international reserve currency. It needs to about double its gold reserves, cut its dollar reserves and trade with US and EU in half first.
I will be one of the few, not shocked and terrified when Bloomberg TV interrupts regular broadcasting to tell that China is backing the Yuan with gold, for any and all central banks who want to hold Yuan instead of dollars. (“Not terrified” as Brazil will still be economically OK as one of China’s main suppliers of meat and soy and other food stocks, lumber, minerals, and oil.)
To make it clear this is "on thread." Note I still predict that gold will be between 5000 and 10,000 Yuan per ounce in about 5 years more. No one will quote gold, oil or grains etc. in dollars then, just as they are no longer are quoted in pounds sterling, the earlier world reserve currency.
PS if you think China will not take great delight in destroying Western economies, read this post:
http://www.sciforums.com/showpost.php?p=2668027&postcount=358
But in addition to getting their long waited for vengeance, there is a huge economic incentive:
With US and European economics in the trash can of history, there will be adequate supplies of oil and minerals for China’s needs, without the great prices increases competitive buying by US and EU would make.
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