Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

A Ponzi Scheme Called America

Tuesday, October 16th, 2012
By for Profit Confidential

dollar with magnifying glassAs we all know, the eurozone credit crisis has taken away any chance of economic growth in the global economy.

Spain—the current epicenter of the credit crisis in the eurozone—has seen its credit rating downgraded to a credit rating of BBB- from BBB+ by the Standard and Poor’s (S&P) credit rating agency. A credit rating of BBB- is the lowest investment grade credit rating issued by S&P and just one notch above “junk” status. (Source: Standard & Poor’s, October 10, 2012.)

In 2007, eurozone member Spain saw its national debt equate to 36% of its gross domestic product (GDP) that year. Now, with the government’s plan to borrow more than 207 billion euros next year, the country’s debt as a percentage of GDP will reach 91%. (Source: Business Week, October 11, 2012.)

Let’s not forget; Spain is a major contributor to the eurozone economy and is the 12th largest economy in the world.

From all of this, what bothers me is that the U.S. economy—the biggest economy in the world—is sitting on the credit rating of AAA, as issued by Moody’s Investor Services, and AA+ by S&P, the same credit grading that puts Spain’s rating at BBB-.

While the U.S. enjoys a strong credit rating of AAA, the national debt compared to GDP for the U.S. is much higher than that of Spain, a eurozone country. In the U.S., this year’s GDP is estimated at $15.5 trillion. (Source: Bureau of Economic Analysis, September 27, 2012.) But the total national debt of the U.S. stands at $16.2 trillion (see the U.S. debt clock at www.investmentcontrarians.com). This makes the U.S. national debt equal 105% of GDP, and it is growing each passing day!

So why does Spain, an economy in the eurozone with a debt to GDP of 91%, have its credit rating cut to almost junk, while the U.S. enjoys one of the top investment grade credit ratings when its debt-to-GDP ratio easily surpasses that of Spain?

Spain will eventually get a bailout from its eurozone peers—the funds it needs to recapitalize its banks will be given to the government.

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When it comes to the U.S. economy, who will come to its rescue?

Oh, I forgot the big difference. When the U.S. needs to issue Treasuries to pay for its debt, the Federal Reserve prints money to buy the debt. That’s the difference; the U.S. prints money, Spain can’t. The U.S. is a Ponzi scheme, and eurozone member Spain isn’t; so the U.S. gets a top credit rating. Now I understand how it works.

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  • Richard Lawrence

    Isn't this what Madoff said while he was getting carted off to jail? Is this news to anyone?

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles