A Ponzi Scheme Called America
Tuesday, October 16th, 2012
By Michael Lombardi, MBA for Profit Confidential
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.
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.