Government debt default risk high

The risk of default on US government debt is high, but the debt ceiling isn’t the cause. The cause will be war in the Middle East.

Where government debt stands

The debt ceiling now stands at $14.3 trillion. Recently the House of Representatives soundly defeated a measure to raise it without cutting spending. Former Governor Sarah Palin (R-AK) said yesterday that the government should not raise the debt ceiling. The government should cut its budget and stop spending to excess, she said.

But will any other country buy any more US government debt? They might instead demand payment on what they now hold, and refuse to buy. That is the real government default risk.

The Chinese have actually done what everyone was afraid of. They have sold off 97 percent of the short-term US government debt they once held. They once held more US government debt than any other country. In February of 2011, they handed that title back to the Japanese. And that was before The Earthquake.

Moody’s said two days ago that they might downgrade US government debt from its AAA rating. Yet the Los Angeles Times suggested that Moody’s wants the debt ceiling to rise. If true, then Moody’s misses a bigger problem. In March of 2012, the Treasury must find buyers for $1.7 trillion in short-term government debt notes (T-bills and T-notes) that will come due. Even the deficit is not that high. Yet.

The Chinese are not likely to buy anymore. They now hold about $1.1449 trillion, now in longer-term debt. But the worst threat does not come from that quarter.

An Arab sandstorm

An even greater risk comes from the Middle East. Under the petrodollar system, the Arabs accept US dollars as payment for oil—and buy US government debt with their proceeds. The Arabs are one war away from abandoning that system.

They might try to abandon it anyway, war or no. The US dollar is a bad deal, and getting worse. The euro looks like the rising star now, probably because the European Union is deliberately manipulating it. Even that will fall before the time-honored objective store of value: gold.

And the war drums are beating already. Caroline Glick (The Jerusalem Post) gave her perspective yesterday on the Egyptian revolution. Her conclusion: the Muslim Brotherhood is going to take over Egypt and start a war. The evidence is clear:

• Egypt has allowed Hamas (“Islamic Resistance”) and Al-Qa’ida (“The Base”) units to base themselves in the Sinai desert.
• Egypt’s military made the Hamas-PA reconciliation possible.
• Egypt reopened its border with Gaza.
• Egypt has cut off natural gas shipments to Israel. This last recalls Gamal Abdel Nasser’s original 1967 closing of the Straits of Tiran.

Glick wants the Tzahal to recruit and train another infantry division, and start training for desert warfare.

Add this to it: Israel’s Home Front Defense Minister has warned that the Syrians would fire brace after brace of missiles to knock out Israel’s new offshore gas wells in the Mediterranean.

Thus a repeat of the Yom Kippur War could come any time. When it does, the Arabs will dump their US government debt holdings. They might buy European (perhaps Greek) government debt instead, or simply buy gold.

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The real government default risk

This, then, is the real risk of default on government debt. The debt ceiling has nothing to do with it. Raising it will do no good if no one will buy any more bills, notes or bonds. And it won’t matter if the present holders simply hand in their government debt paper and say, “Pay up!”

Yet the President has just pledged $20 billion more in debt forgiveness, economic aid, and similar baksheesh to Egypt and Tunisia. That’s bad for business, for two reasons:

1. We can’t afford it anymore, if we ever could.
2. Egypt is going to take it, arm themselves, and go to war anyway.

Things to do

Americans can’t wait for a change of government to stop this disaster. Things to do now:

Pay down your own debt. Aside from your not wanting to play the hypocrite, the interest rate will rise, and will break your bank if you don’t pay it off.

Lay in supplies of food and water, or at least make sure to have a good source other than the store or the water company.

Buy gold and silver, and hold it physically. That kind of trade takes time to settle, so act now. Buy enough so that the dealer will waive shipping, and even throw in some extra coins if the price goes down in the meantime. When—not if—war breaks out in the Middle East again, the price will go up, not down.

Other than that, let your Senators and Representative know: Do not raise the debt ceiling under any circumstances. A higher debt ceiling won’t help anyway. The government debt has always been too big. Now the people must start to pay it off.

Featured image: the Damascus Road, from the Golan Heights. Photo: CNAV.