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Credit Rating Mirages & Sovereign Illusion Defaults: Where to Perch?
The case of BRK/A, which took material first-time hits on earnings and equity from derivatives, was rather ironic. BRK’s eminently quotable chairman called derivatives weapons of mass financial destruction. He kept on selling them, hoping to keep the premium without reserving the liability in full. He recently renegotiated some terms. We saw how this worked out so far with AIG, GM et al and may see how it works out with Uncle Sam.
$200 Trillion in American Bank derivatives may either require startling growth in the US economy or more than 15 years to pay off with a GDP of $13.3 Trillion. If the GDP continues to contract at the 12.3% rate of the last three quarters, we may see more defaults with continuing deflation and depression.
No wonder American consumers and corporations are paying off debts, reducing leverage and ramping up savings.
This conservative stewardship wreaked havoc with markets and people conditioned by generations of expanding debts, deficits and dollars. Indeed, the Federal Reserve Bank System and current Treasury, in contrast to Constitutional Currency based on Gold and Silver (and US Mint defacto Copper), are based on expanding usury while it is currently contracting. Many do not comprehend the consequences of Arabs, China, Iran and Russia going off the dollar and eschewing dollar-denominated debts. It may not be inflation, but more contraction with more defaults and higher risk interest rates. In short, we risk a scarcity of real capital.
This especially concerns those of us who still seek to practice common sense conservation as good stewards.
The Bank for International Settlements in Basel, Switzerland reported although total global derivatives outstanding fell by the end of 2008, they still stand at $592 trillion, well over ten times the value of the world GDP. One way of looking at that is either things have to miraculously get better, or it may take decades for the world economy to recover from overleveraging with debts, deficits and derivatives.
All of these events were characterized by Credit Ratings which were neither accurate nor timely. They were exacerbated by a Bank lobbied Congress which dismantled financial protections dating back to the last Great Depression, ignored constituents 100:1 and passed special interest bailouts and budget deficits dwarfing previous records.
