Default Swaps (12-19-11)
Many people get upset with me and email me that I am being too hard in my opinion about our future. Many think that I am being negative or down on America. But I tell them that to turn our heads and just hope that all is well when everything is falling apart is not a wise approach to take to the chaos in our world today.
Here are the facts:
1. The U.S. will end 2011 with more than $15 trillion in debt.
2. We have $75-100 trillion of unfunded liabilities that must be paid for with no funding mechanism in place.
3. Congress isn’t capable of dealing with these issues.
In recent polls, Congress’ approval rating has dropped to only 6%! That’s the lowest in history! Only 6% of the population has any confidence in Congress to deal with the issues. In fact, anyone watching from the sidelines has to shake their head. This lack of confidence that America has the leadership in place to save herself was one of the determining factors that the S&P looked at when they devalued our credit rating. When the super committee failed (as if that was a surprise) they threatened to lower the rating again. I mean let’s face it, if you’re in trouble and can find no one to row the boat, you’re really in trouble, and your chance of making it to land are very slim if not impossible.
As I write this note, we see Europe in a mess as well. Portugal is bankrupt! Greece is bankrupt! Italy is bankrupt! France is nearly bankrupt! Iceland is bankrupt! The Euro is in trouble as it follows the U.S.’s lead in fiscal policy. As I said in my last post, Greece and Portugal owe billions, but Italy owes trillions and is sliding towards sovereign default. The problem we face is that we are now a global economy. If one nation defaults it will impact many other nations. This was accomplished by the $600 trillion (plus) global derivatives pyramid, which was created and spread around the world by Wall Street.
If you’re not familiar with what I am talking about it involves what is called a credit default swap. These are a kind of insurance that buyers of government bonds or any bonds can acquire in order to protect themselves from the default of such bonds. The danger of this system is easily seen in what the default insurance devices are called: derivatives. This means that someone may lend money to a company based on the fact that their risk or debt exposure is covered by a credit default swap. Someone else also lends money based on that fact to the company that is counting on someone else having their debt covered by default insurance, and so on and so on. So before you know it, one bond that defaults can ripple down through many companies causing defaults like dominoes falling over. So the first bond, which was issued in our default derivative example, may be the collateral backing up thirty other bonds and deemed secure because it is backed up by default insurance. But what if the company that is insuring the default insurance goes bankrupt and then the company that backs up that company’s default insurance goes bankrupt?
The danger of this system is obvious. Trillions of dollars are all tied together like a giant pile of dynamite, which would all go up in a burst of flames if just one stick of dynamite goes off. That’s how fragile the global economic system is. And, this is why the U.S. will do anything to stop this from happening, including printing money, to avoid a default on its debt.
So, what will happen in the future? The U.S. will print more money. This is bad, because it causes inflation and the devaluing of our dollar. I’m not a bad guy if I tell people this. It isn’t wrong to warn people about what is going on and to let them know this isn’t sustainable. But at the same time, there is hope. In the Kingdom, there is always a way, always. That is why I am so passionate about the Kingdom. It’s one system that is built on truth, not paper money and debt. We don’t need to fear the days ahead. We need to draw close to our God. He is faithful.
Have a Merry Christmas with your family!
Gary Keesee
