Saturday, January 29, 2011

USA - A Step Closer to Bankruptcy ?

Alarming! You Bet, IT IS.  John Doe lives on a $50000 a year salary and have normal expenses like everybody else.  He also has atleast 2 credit cards like everybody else with $10000 total limit (which he earned by having good credit history for last 10 years) on them.  Now, he gets 2 more credit cards for another $10000.  Life is good.  John goes on a spending spree over few years and maxed out all of his credit cards but he is still trying to pay them off like a good "American" Citizen.  All of a sudden he gets problems at work and finds himself out of job.  Started raining, I guess.  And to make things worse his rent went up, the gasoline went up and prices of groceries went up....adding insult to injury he missed one credit card payment and his interest rate went up....okay okay...long story short.  Someone knocking on the door? Bankruptcy.  Yes, It is Inevitable.  Simple as that. 

I am sure you've heard this story before, this is what our entire nation has been going through over last many decades.  It has trapped many innocent people willingly or unwillingly into it.  Now, we are all part of this death spiral.  Personal Debt. is a problem in itself.  But Guess, what our great country is not doing anything different.  There is a fundamental problem in here.  I've pointed out before in my older posts about the massive debt and the debt to income rations we are facing, I came across another good reads on the same subject, only this time it's not "good" its "WORSE".

Bill Gross, who is the manager of the world's largest mutual fund, Pimco Total Return Fund hints that we could be a step closer to one of the biggest financial disasters this world has ever seen.  Our country is primarily funded by these Treasury/Bonds investors like Bill Gross and countries like China, Japan etc.  US Treasury sells these Bonds to Bonds Investors in return for a "GUARANTEED" payment plus any interest.  USA has been selling these bonds in international auctions every month and now our total debt has come pretty close to it's limits, $14.3 Trillion.  There is a debate ongoing in the Congress whether to raise these limits or not.  We are at a crossroads with this.  If this limit is raised that means more debt which the bond investors think the USA will never be able to pay.  If the interest payments go up so will be the ability for us to sell more debt, hence the interest rates may go up, dollar may collapse and the dominoes may start falling when one after another the bond investors start pulling their money out of USA.  Eventually the world Credit markets would come to a halt.  A major disaster.  I think this would dwarf any financial disasters we have faced so far.  I am sure the USA (Treasuries, Feds, Congress and everyone else in govt.) has some tricks still left up their sleeves which they can use to "delay" the process.  But unless and until our debt to income ratios don't get better the problems are inevitable.  Now let's see how can USA reduce the debt.  One thing I read was stopping Social Security Payments to Americans rather than missing their interest payment to China. Neither of these two are good.  The question is not "IF" but "WHEN" will this happen!  I hope it doesn't for the good of millions of people.

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