◄$$$ USTREASURY DEFAULT COULD OR SHOULD OCCUR, ACCORDING TO THE GREENSPAN-GUIDOTTI RULE. A LITTLE CITED GUIDELINE HAS BEEN RESURRECTED SUDDENLY AS RELEVANT. THE ISSUE IS RESERVES FORMALLY HELD BY THE USGOVT, WHICH ARE IN REALITY LOADED WITH EXAGGERATION. THE USGOVT HAS PRACTICALLY ZERO GOLD RESERVES IN REALITY. PORTER STANSBERRY WOULD NOT BE SURPRISED TO SEE A GOLD PRICE OF $10 THOUSAND PER OUNCE BY YEAR 2012, AS A CONSEQUENCE OF THE POTENTIAL USTREASURY DEFAULT COMES CENTER STAGE. $$$

The world of central bankers puts some significance on the Greenspan-Guidotti Rule, used as a theoretical basis for government debt default. It has been dusted off and put squarely on the center of conference tables. Experience of its application in the past has been with Third World debt. The actual data for the USGovt is astonishing, incredible, fantastic, reckless, even indescribable. Few point to the military costs and foreign weapons aid that account for up to half of the debt. Within the next 12 months, the USTreasury must refinance $2 trillion in short-term debt. Nevermind the total debt being financed, and focus just on the short-term debt, since it usually causes the acute problems and crises. Additional deficit spending will also amount to another $1.5 trillion. The key question is how can the USTreasury borrow $3.5 trillion in the next several months? That sum is almost 30% of our entire Gross Domestic Product for the United States. Major companies often bear debt with short maturity, but manage to roll it over. The recent trap has been to pursue the near 0% interest rates on the short-term side, but doing so requires satisfaction of rollover requirements that grow tougher with time. Homeowners have such trouble, and governments soon will also. A strategy to minimize borrowing costs can backfire.

Creditors are awakening to the prospect of never being repaid, let alone with interest. Funding costs soar when the alarm bells finally go off. The party is suddenly over, and bankruptcy remains as the lone option. That is bankruptcy for a nation. When governments go bankrupt, the credit market calls it a 'Default.' Currency analysts and traders determined have worked to accurately forecast when a country would default. Two well-known economists Alan Greenspan and Pablo Guidotti published the formula in a 1999 academic paper that remained a relative secret until recently. The formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money-management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support." It is widely accepted in a textbook sense.

The principle behind the rule can be simply stated. If unable to pay off all foreign debts in the next 12 months, a nation stands as a terrible credit risk. Speculators proceed to target bonds and currency for the nation, forcing a run, thus rendering impossible the refinance of debt in rollover. A default is then assured. For the USGovt, according to the Greenspan-Guidotti criterion, a guaranteed default is highlighted. Next examine the tangible reserves held by the United States Govt. Like most official statistics, they contain a large dose of fiction to conceal the reality of extreme vulnerability and pilferage.

The USGovt holds gold, crude oil, and foreign currency in reserve. It claims 8133.5 metric tonnes of gold, which would rank it as the world's largest holder if true. But it is a total lie. At current values, the gold reserves would be worth in the neighborhood of $300 billion. The US Strategic Petroleum Reserve is indeed real, and shows a current total of 725 million barrels of crude oil. At current values, that is worth around $58 billion. Lastly, the USGovt holds $136 billion in foreign currency reserves, according to the IMF. In total the USGovt is in possession of $490 to $500 billion of reserves. The total in reserves pales by comparison to short-term foreign debt.

Next consider the short-term debt. According to the USDept Treasury, $2 trillion worth of debt will mature in the next 12 months. Long gone are the days of funding the national debt internally from savings and pension funds. Since 1985, the United States has been a net debtor in global terms. Foreigners own 44% of all USGovt debts. That means the US must produce foreign creditors with $880 billion in the next 12 months, an amount that overwhelms reserves. Furthermore, in complete exacerbation of the debt structure, the USGovt must finance new deficits in the coming year. The Office of Mgmt & Budget forecasts a $1.5 trillion budget deficit in the next fiscal year. Combine to make total funding requirements of $3.5 trillion over the next 12 months. Domestics savings cannot be counted on for such large sums, since only $600 billion annually. Foreign creditors have begun to halt extension of credit supply. Note the Indian and Russian central banks, which have stopped buying USTreasurys. Instead, they have turned to the arch enemy asset in gold, buying enormous amounts of bullion for reserves. The Global Paradigm Shift centers on a revolt against the USDollar (damaged, debased, discredited) and the USTreasury Bond (bloated, monetized, at great risk). According to the Greenspan-Guidotti Rule, the alarm bells for USGovt debt versus reserves went off long ago, and ring louder every day. Russia declares the central bank will double its gold reserves. China declares a planned six-fold increase in its central bank gold reserves in the next few years. The alternatives to USTBonds are gaining momentum.

The printing pre$$ is the logical alternative to finance the USGovt debt, in pure Weimar style. The failed German state from 70-80 years ago is well studied, but hardly brought to the current picture as relevant, a grand error. In fact, that is precisely the dirty secret. Officially, the USFed has been buying both USTBonds and USAgency Mortgage Bonds, pure monetization and debasement of the USDollar. But unofficially, the USFed has been buying new auction bonds from both the primary domestic bond dealers and subsidizing purchase of auction bonds by the foreign central banks. The US Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt, in fact, a staggering sum. So far the monetization process has considerably weakened the value of the USDollar, and devalues the foreign reserves held in USTreasurys. Stansberry expects before long, foreign creditors will face a difficult deadly choice: Hold USTBonds and suffer diminished value, or rush in an escape to gold as their reserves held in USTBonds plummet in value. They have called a halt to further USGovt debt purchase. He cites Brazil, Korea, and Chile as the three largest central banks that own the least amount of gold. None owns gold amounting to even 1% of its total reserves.

A recent New York Times article repeated the same warnings about short-term debt versus reserves held by the USGovt. However, the author happened not to mention the Greenspan-Guidotti Rule, the secret of international speculators. The dynamics of the rule dictate a severe currency crisis within the next two years. The gold price will rise sharply during this anticipated crisis, one reason for its rise, and a main reason never cited by those who pretend to understand the gold market. For certain, the numbers have never been so large and dangerous. Porter Stansberry for one would not be surprised at all to see gold at $10,000 an ounce by 2012. See the Kitco article (CLICK HERE).

Now for a dose of reality. The USGovt has a big hidden problem. The United States might not own even one ounce of gold any longer. The crude oil and foreign currency reserves are very likely real, but not the gold. They usually report gold reserves as being 'Deep Storage Gold' which means unmined ore and unrefined gold bars still locked in mineralization form rather than bullion bars. During the Clinton-Rubin Admin, not only was the US-owned gold sold off, but the USGovt borrowed European gold and sold it too. This paid for the Stolen Decade of Prosperity, the 1990 decade whose prosperity few comprehend. So the above default risk rule puts the USGovt as far more at risk than even perceived on the surface due to faulty reserves tally, when official data is believed. Doing so is a grave error. The United States is an empire with piddly reserves (no clothes).

◄$$$ THE ECONOMIST WARNS OF A BROADER CONCERN OF GOVT DEBT ACROSS THE WORLD. THEY CALL IT THE NEXT BIG PROBLEM. KEEP FOCUS ON GREECE, THE WEAKEST LINK IN THE EUROPEAN CHAIN, AND THE CLOSEST TO HOME IN THE WESTERN WORLD. $$$

The Economist magazine calls Dubai a 'small fry' problem. They expect scares over government default will be the world economy's next big problem. In the two weeks after the Dubai World announcement of its debt default, or delay, or standstill, the financial panic appears to have disappeared as quickly as a desert squall, in the words of the magazine. Some analysts deny the importance of the entire Persian Gulf region from a financial perspective, with the Dubai events lacking broader significance, but surely inflicting great harm to their credibility as a debtor. Dubai debt signifies much wider uncertainties, as my August warning indicated. Estimates of their credit losses are rising and will continue to escalate, notably in commercial property. The Economist points out the more important repercussion has to do with sovereign risk on a global scale.

At issue is the nature of the Dubai World debt. It was not technically backed by any government guarantee, but it was widely regarded as such by investors, who made scant distinction between the Dubai Govt and a company wholly owned by sheiks in power. The repudiation made by Dubai of the implicit guarantee marks an important milestone in global finance. In an immediate sense, it has prompted a reappraisal of the inherent risk of other Persian Gulf debt, in neighboring countries. The contagion has also spread to increased concerns about overextended emerging economies suc h as Hungary and Latvia. Closer to the Western world, more heightened anxiety has come to the prospect of default in the marginal economies of the EuroZone, in particular Greece. No examination yet seems apparent of Mexican debt, sure to default. An assumption has long been held, now in question, that the European Union would offer firm rescue under formidable pressure, which means Germany. Clear or implicit government debt defaults are coming. See the Economist article (CLICK HERE).

◄$$$ THE LIST OF POTENTIAL GOVERNMENT DEBT DEFAULT CANDIDATES IS LONG AND SPANS THE GLOBE. THE PROCESS HAS ALREADY STARTED, WITH THE GOVERNMENTS OF SPAIN, GREECE, AND PORTUGAL HAVING RECEIVED EITHER DEBT DOWNGRADES OR REDUCTIONS TO NEGATIVE WATCH. THE DOMINOES HAS BEGUN TO TOPPLE. $$$

The ranking is largely irrelevant since they are all interconnected like so many dominoes. A strong banker contact provided a ranking as an exercise, shared for our benefit. He listed the candidates for government debt default as 1) Dubai, 2) Ukraine, 3) United States, 4) Baltic States, 5) Eastern Europe, 6) United Kingdom, 7) PIGS nations with Greece first, 8) France, 9) Rest of the UAE, Kuwait, Qatar, Saudi Arabia, 10) the Stans of East Asia, 11) Argentina, 12) Mexico, 13) Most European Union countries (except Germany, Benelux, Austria, Finland). THINK DOMINOES, WITH THE UNITED STATES PROVIDING THE LOUDEST BANG, EVEN FROM THE THREAT PROSPECT.

The most important government debt default is by far the United States. Its crumbling finances are worsened by the endless war in support of private syndicates. The USGovt deficits are wide and growing wider. The deficits show no sign of stability, despite the urgent talk, loud promises, and empty rhetoric. Note the direction of the USGovt revenue receipts, heading down since 2006 and still heading down. Strains to USTreasury auctions necessary to finance the federal debts in securities would be a monthly crisis topic of discussion if not for the hidden monetization by the USDept Treasury and US Federal Reserve. Press coverage of monetization seems totally forbidden, verboten!! My firm belief is that the Obama Admin is committed secretly to sending USGovt finances over the cliff and forcing a USTreasury default, one that invites a USMilitary coup. Thanks to Casey Research for a fine chart.