Gold Made Simple downgrade USA from “AAA” to “D”
Gold Made Simple have taken the unusual step of not waiting for the inept/corrupt main rating agencies in the USA to do the right thing and have downgraded the US all the way to default themselves. After the debt ceiling raise announcement this week Gold Made Simple claim this all but guarantees a default, the only question is in what manner it comes. They explain their downgrade below:
Rather than wait for the rating agencies to downgrade the USA, Gold Made Simple ® has decided to show them the way and has downgraded the USA all the way to ‘default’. After all these are the same rating agencies that all had AAA ratings on sub-prime mortgages right up until the day their value went to zero.
With such a poor track record Gold Made Simple ® thought the credit agencies might need a hand looking at the numbers in the reported debt ‘deal’. Whilst Gold Made Simple ® feels the rating agencies are left will little room but to downgrade the US, their track record hasn’t exactly been great. The reason for the “D” rating is as follows:
The debt increases:
Today Congress have voted on a deal to raise the debt ceiling of the USA. The debt ceiling will be raised from $14.3tn to $16.7tn. The new debt ceiling will be reached in Q1 of 2013 at the latest.
Spending increases:
For all the talk and spin about cutting spending, the actual facts are that in each and every year for the next 10 years spending increases over the previous year. In fact Senator Coburn, on the floor of the house, said that calling the plan “spending cuts” was a “lie”.
Total deficits increases:
The “deal” means that the US government will have to borrow about $1tn next year to fund the gap between revenue and spending. And over the next 10 years total deficit spending will be nearly $6tn. This means that in the best case scenario the national debt of the US will be north of $20tn by 2021.
Bad history of forecasting:
The above numbers are calculated using the Congressional Budgets Office ‘March 2011 Base Line’. But even here the debt numbers will probably be woefully short of what the real numbers turn out to be. The CBO has a terrible track record of forecasting even for the following year much less the next 10.
The best example of how off their 10 year forecasts can be is the CBO’s 2001 budget report. In 2001 the CBO was predicting that by 2011 the US government would have produced a $5.6tn surplus, instead the cumulative deficit for this period was $6.2tn. That’s ‘only’ a forecasting error of some $11.8tn.
Already the CBO forecasts for this year will have to be revised. The White House is still forecasting (and making budget projections) assuming a 4% GDP number for 2011 and the CBO is still using projected GDP of 2.7% to make its forecasts for 2011. After last Friday’s revisions the US economy grew just 0.425% for the first 6 month of the year. Barring a miraculous turn around in the remaining 6 months of the year, GDP for 2011 will be less than 1%.
It’s not just GDP that the CBO will have to revise, it is also the rate of inflation. The CBO is still calculating budgets using CPI for 2011 of 1.6%. The most recent BLS report puts the CPI running at 3.6%.
Whilst these differences may seem small in percentage terms, in a $14tn plus economy and over 10 years, these seemingly small differences will add trillions of dollars to the US debt.
Not serious about cutting the debt:
In short the US has shown absolutely no appetite to seriously and honestly attack the historic levels of debt in the US and in fact they have decided to increase the debt. How can a problem of debt be solved with more debt? It can’t.
How will the US default:
For this reason it is now clear that the US will default on its obligations. The only real question is what form this default will take. History tells us that great countries never default ‘honestly’, that is restructure the debt and pay creditors back less money. Instead all countries that get in debt problems take the easy option and decide to pay the debt back in devalued money. That is, governments always inflate the debt away.
This method destroys the purchasing power of the money in peoples pockets as the cost of buying things eventually rises violently.
What the debt ceiling hike means for the price of gold:
The action by the politicians in the US tells you that they will always take the easy option when faced with tough choices. And the easiest option of all is simply to print money to literally paper over the problems. With $2.4tn in additional borrowing needing to find a home it almost guarantees that the Federal Reserve will announce another round of money printing (quantitative easing) to make sure someone can loan the money to the US.
This means that the dollar will keep being devalued and the price of gold will continue to rise.
How high can gold go in the UK?
Gold Made Simple ® has taken 3 different analytical approaches in trying to determine the gold price:
• Comparing the gold bull market of 1970-80 to today
• The relationship of the Bank of England’s balance sheet to gold
• The relationship between the UK’s national debt and gold
Comparing the gold bull market of 1970-80 to today:
Gold Made Simple ® has compared the bull market of 1970-1980 in gold with the current bull market. Its findings were:
• During 1970-80 gold went from £15-£371, a 2500% increase
• During 1970-80 the BoE increased its balance sheet (printed money) by 300%
• During 2000-11 gold has gone from £180-£1000, a 555% increase
• During 2000-11 the BoE increased its balance sheet 1000%
• For gold to match the bull market of 1970-80, gold should trade north of £4500
The full analysis with charts can be read here:
The relationship of the Bank of England’s balance sheet to gold:
Next Gold Made Simple ® has looked at the expansion of the Bank of England’s balance sheet and gold. It’s findings were:
• Gold holdings at the BoE have collapsed over the past 60 years
• Today the BoE holds 310 tons, in 1950 that figure was 2543
• The BoE balance-sheet has been a vertical line straight up in the past 4 years
• At £1000 per ounce just 4% of the nation’s money is backed by gold
• A return to the long term average of a 20% gold backed balance sheet would require a gold price of £4670
The full analysis with charts can be read here:
The relationship between the UK’s national debt and gold:
Finally Gold Made Simple ® has taken a look at the correlation between the UK’s debt and gold. It’s findings were:
• The UK national debt is predicted to be £1.314tn by 2015
• There is a strong positive correlation between higher debt and higher gold
• If gold repeats the 1980 peak, in debt:gold ratio terms, then the price of gold will have to reach about £5050
The full analysis with charts can be read here:
Conclusion:
After analysing the interventions by the BoE and the increasing national debt Gold Made Simple ® has a 4 year minimum gold price target of between £4750-5000.
Related posts:
- An Introduction to Gold Made Simple ®
- Cash for Gold Companies Made to Clean Up Their Act
- Bloomberg show that money is debt: Gold vrs the ‘debt target’
Link to this article: : http://www.goldmadesimplenews.com/gold/gold-made-simple-downgrade-usa-from-%e2%80%9caaa%e2%80%9d-to-%e2%80%9cd%e2%80%9d-4768/
Posted by Thomas Paterson on Aug 4 2011. Filed under Analysis, Gold News.
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