A Run on the United States Government
Michael S. Rozeff
by Michael S. Rozeff: Western-Islamic
A run is a
mass withdrawal of cash funds from a borrower. We are in the midst
of a continuing worldwide credit crisis, punctuated by "runs"
of varying prominence and publicity.
are rational, not panics and not due to quirks of psychology. They
occur when investors realize that their funds are endangered in
an institution. They try to get them out before they lose them.
comes when the institution no longer is getting cash inflows in
sufficient amounts to pay off all its obligations. In businesses,
this comes about through sour investments. In governments, it comes
about through wasteful spending that fails to be recovered in tax
In the year
2008, we saw runs on major Wall Street investment banks, money market
mutual funds, domestic banks and foreign banks. Now we are seeing
runs on governments in Europe such as Greece and Portugal. Sovereign
debts are being sold down hard as investors flee from them, converting
their bonds into currency.
from the 2008 credit crisis, the Federal Reserve is still providing
massive credit to U.S. banks. This props them up against bank runs.
Every so often, the FED extends credit to foreign central banks
to prop them up so that they can prop up their financial institutions.
These are stopgaps. All of this propping up depends on faith in
one currency: the U.S. dollar.
Runs on various
institutions often show up as a flight into short-term U.S. treasuries,
i.e, the dollar. This is because the treasury market is deep.
Since the dollar
is also a credit instrument, it is subject to credit risk. What
happens when trust in the dollar drops sharply? What happens to
all these financial institutions being propped up by creating dollars
when trust in the dollar fails? That is when the financial system
cracks wide open. That is when governments will be tempted to freeze
funds in banks and prevent withdrawals the way that Argentina did.
That is when the FED will be tempted to guarantee almost any institution
against cash withdrawals, but when such a guarantee will be ignored.
That is when gold will soar in price against the dollar and all
other fiat currencies.
I am describing
a run on the United States government. This will be a withdrawal
of cash financing from the U.S. government. This is the ultimate
credit crisis upheaval. This will be accompanied by mass social
unrest and political reorganization. Stock and bond prices will
fall sharply. The S & P 500 will lose at least 60 percent. Government
bonds will yield at least 10 percent. This event is foreseeable.
It is also avoidable, but not without much pain and travail. Hence,
although foreseeable and avoidable, it may still occur.
like it or not, we are all currency speculators now. This is hardly
a burden we can relish.
not a run on the United States government occurs is in the hands
of its creditors. It depends on their trust in the dollar. Their
trust depends on their understanding of Americaís political economy.
looks objectively at actions being taken by the U.S. government
to bolster its credit or cause its credit to deteriorate has to
reach a very negative conclusion. Why? Simply because the countryís
leadership has been taking it downhill for decades on end. America
is like a bright and fresh red apple in which rotting has been proceeding
inexorably. The apple still has some edible portions but large parts
of it are gone. The seeds need to be planted and a new tree grown.
Credit Ratings Co. Has 15 categories of ratings of sovereign debt
(AAA, AA+, AA, AA-, A+, A, A-, BBB, BB+, BB, BB-, B+, B, B-, CCC.)
The U.S. has a rating of A+. Dagong lowered it from AA- to A+ in
November 2010 after the FED announced a new QE program.
In a remarkable
statement made in mid-June 2011, Dagongís
president said "In our opinion, the United States has already
been defaulting." Dagong has spent $1 million to enter the
U.S. market, but the SEC has so far turned it down.
over the debt ceiling, like all Washington debates, is throwing
off negative signals about U.S. credit. Obama is the key person.
He is airing various proposals in public in press conferences. If
he were serious about any of them, heíd be working closely with
key Congressmen in private behind closed doors. He would not be
trying to box in Republicans or embarrass them in public or score
political points. He would have been working on controlling the
budget long before this. He would have shown leadership on this
long ago. One does not place multi-trillion dollar proposals on
the table and expect them to be taken seriously, debated and acted
upon within 2 or 3 weeks. Obamaís credibility on serious budget
control is nil. The Republicans and even members of his own party
have little reason to trust him when he paints himself as on a high
road and willing to compromise. Any compromise will be on his terms
to further his agenda. The debate, such as it is, canít be taken
Did the near-miss
of the 2008 credit crisis prod the U.S. government into corrective
action? Sure, bailouts and wars and deficits and the absorption
of Fannie Mae. The U.S. government has had three years to enact
measures to revive the economy, clean out the bad debts in the banking
system, and get the U.S. budget under control. Make that thirty
years or more. At this moment, I canít think of one good step it
has taken. Look
for yourself. Do I see healthcare in there as the centerpiece
along with Wall Street reform? Donít make me laugh.
U.S. government has no credibility in terms of restoring America.
The government is living off its past reputation, like a once great
entertainer grown tired and going through the motions.
conditions, trust in the dollar and all the other fiat currencies
that are linked to the dollar will continue downwards.
is a change in these conditions, someday there will be a run on
the United States government. I see nothing that suggests a change
in these conditions.
S. Rozeff [send him mail]
is a retired Professor of Finance living in East Amherst, New York.
He is the author of the free e-book Essays
on American Empire: Liberty vs. Domination and the free e-book
The U.S. Constitution
and Money: Corruption and Decline.
© 2011 by LewRockwell.com. Permission to reprint in whole or in
part is gladly granted, provided full credit is given.
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