A Vulture in 'Default'

The U.S. budget impasse is all over headlines in the media all around the world. The differences between the Senate (mostly Democratic) and the House of Representatives (Republican) have been blocking the approval of the public accounts since last May and have obligated Obama’s administration to apply a sequester — referring to a suspension of state agency expenditures — to avoid violating the debt caps that the U.S. legislation has authorized.

The crisis was dodged by a very thin line, by the disbursements for many social programs. Several articles, including in the financial press, have realized the impact of these measures on the increase of poverty in the United States. These cuts have affected the food stamp program, which had a $40 billion budget. The U.S. public debt is on the order of 120 percent of the gross domestic product, close to $16 trillion, which is only exceeded by the debts of Greece (160 percent), Italy (135 percent) and Japan (240 percent). There is a difference, however; in the case of Europe, the rate has gone up mainly because of the fall in the GDP, while in the U.S. the increase is a result of the growth in the gross debt.

The standstill of the last few days is related to new factors. The Republican Party refuses to approve the expenditures that include the health care reform approved last year, which they call “statist” or “socialist.” The reform, in fact, does not change one iota of the privacy of health care provision in the United States; it only subsidizes a portion of the care for the 48 million people without health insurance. After an even closer look, the reform is just a huge expansion of the most expensive health care system in the world, financed by its users on one hand and taxpayers on the other. An attempt by former President Bill Clinton in 1995 to establish control of health care costs (which were tremendously inflated) ended in embarrassing defeat. Clinton’s objective was to lower the costs of contributions to health care on behalf of companies and the state in order to improve the competitive position of U.S. capital in the global market.

The impasse on this issue has forced many government offices to be shut down temporarily, but it has not affected the financial markets yet; the stock market has reportedly gone up, and the dollar has remained stable. For some, the real crisis will take place on Oct. 17, when the U.S. public debt will exceed the debt cap of $16 trillion, as established by law. In the United States, this norm of indebtedness has existed since 1912, regardless of the debt needs that generate the calculation of costs and resources provided in the budget. In this case, the headquarters of the vulture funds would fall into a “technical default” that threatens Argentina, as a result of court rulings out of New York. Objectively, however, it is already in default since 20 percent of it is funded by the Federal Reserve. The national stockholders fund only 25 percent, while half of this colossal debt is in foreign hands, beginning with China and Japan. A withdrawal from these countries, whose own finances are in ruins and could not withstand a collapse of the U.S. debt, would put an end to the U.S. debt and the dollar.

The U.S. public debt is not just any other debt, for many reasons. It dominates international funding through several channels. For the time being, it determines the trend for international interest rates. The flow of foreign money has allowed U.S. financial institutions to finance their investments in China, where they get an annual profit rate of about 30 to 50 percent, compared to the 2 percent average U.S. bond yield. Looking at the dual or contradictory nature of this flow of capital, it seems that China’s potential debt with the U.S. is greater than the difference arising from the gross debt stock accumulated by each of them.

The purchase debt unleashes a speculative process that goes beyond the initial act. Treasury bonds are used as collateral or a guarantee in order to buy more bonds through loans in succession or to finance capital investments abroad. When the Fed does this, a mechanism is developed from the increased liquidity that occurs in private banks. Through connected financial entities, that money goes to existing assets, the stock exchange, and so-called emerging markets. The global crisis has not weakened financial speculation; rather, it has heightened it. The international bank has about $3 trillion in its safe, which is not, however, channeled to credit or invested in the industry (a sign that the rate of return on capital has not recovered.) This money finances the world’s public debt and applies to all types of financial instruments and to the purchase of rival capital (a greater centralization of capital), as it is occurring now with telecommunications (Verizon — Vodafone, Telefónica — Telecom). An explosive contradiction has developed in this way: The abundance of money on one hand and scarcity of investment opportunities on the other have created a gigantic speculative bubble, whose inevitable burst will determine the ultimate destination of the capitalist bankruptcy underway.

What is curious is the following: The expectation of a “technical default” has not affected the interest rates of the U.S. debt. The U.S. has incurred an early repayment of debts, which was applied from abroad with the prospect that it could raise interest rates in case this “default” becomes definite. This explains, in large part, the wave of devaluations in so-called emerging countries. A fall in the price of the U.S. debt could also lead to a further escalation of gold as a result of the loss of trust in government debt and the dollar, according to speculators.

On the fiscal front, the attack on government spending, based on the pretext of settling the debt, has reduced domestic demand in the U.S. and affected economic recovery. The latest forecast from the Fed points to a further slowdown of GDP. It strengthens the trend toward the depression of the economy, combined with inflation of the debts and currency issues. The monetary issue, along with the fiscal adjustment, without consideration for a massive increase in public expenditure (excluding depreciation and debt interest), creates a “rotation” of money between speculative applications, which lately was removed from circulation by hoarding (gold).

The U.S. debt, whose cap should be expanded in upcoming weeks, since there is no other way to address it other than delaying its payment, is the starting point of a mechanism for increasing financial speculation, whose (new) explosion is only waiting for its (new) trigger. The wick runs through Greece, Italy, Spain, India, Indonesia and Brazil, and the crisis of the U.S. debt.