Credit downgrade theatrics: S+P puts US sovereign debt on negative watch

The global press is currently abuzz with the recent statements by the S+P credit rating service that it had placed the US sovereign debt on "negative watch".  Articles like this one from The Telegraph are typical of what the media is reporting. 

Despite the fact that it has become a major topic in the financial news, I almost decided not to blog about it because it is just more economic theater.  I finally decided to write a few words on the matter because so few people are yet aware that it is in fact just theater.

Let me explain.  The big US default already happened.  It happened in 1971 when Nixon defaulted on US promises to convert government issued greenbacks into the gold they were supposed to represent.  Nixon didn't just change the rate of convertibility like he could have done.  Instead, he completely defaulted on the entire promise of convertibility.  That was the major economic event of the century yet skillful politicians managed to paper over it for a few decades.  That doesn't mean that they fixed anything.  They simply delayed the day of reckoning. 

It is nearly analogous to a "home owner" (home debtor is more like it) who simply stops making the monthly payment and who refuses to move out of the house until the police forcibly evict him.  A huge number of people are doing this right now.  They count on the fact that banks are insolvent and are stalling for time hoping to become solvent so that they can finally foreclose and evict.  Banks do not want to do this as long as they are insolvent because it will require them to write down the loss on the house instead of claiming the debt as being worth full face value on their books.  Foreclosure is bad for banks because it disallows them from continuing to legally (but nonetheless fraudulently) report an overstated value of the assets they own.

Likewise, the world could not afford to just stop dealing with the US back in the 1970s and so it not only continued doing business with us almost as if we hadn't defaulted but even more ridiculously it allowed us to continue to own the world's reserve currency.  That's right, we completely defaulted after other sovereigns had caught us with our hands in the till and they still let us be the banker in this global game of Monopoly.  Perhaps it was because they could not declare us bankrupt without also declaring themselves bankrupt.  Perhaps the size of our military helped shape their views on the matter (if you try to declare us bankrupt we will kill you in the name of national security...).  The writings of Smedley Butler should be enough to help you suspend disbelief in this regard.  Perhaps it was a little of both.  But the whole notion of US credit rating being maintained at AAA for even a nanosecond after defaulting on the largest financial contract in the history of the planet is so ludicrous that any ratings "negative watch" or actual credit downgrades are complete theater at this point.

Since 1971 I see that the conditions which allowed the US to remain in charge (i.e. be the world's fractional / fictional reserve banker) have only increased in magnitude.  In other words, what other sovereign in the world is actually solvent?  I don't mean "apparently solvent" or "can argue that they are solvent".  I mean actually solvent.  I contend that nobody is.  All nations are either in massive debt or have been lenders to those who are in massive debt or whose apparent prosperity has been driven by debt based spending of insolvent sovereigns.  Is Germany solvent?  Not if the PIIGS default and certainly not if the US defaults.  Are the commodity export superpowers Canada and Australia solvent?  While they appear to be, look at the housing bubbles in those countries which are rolling over right now.  Their banks are insolvent because they lent too much money out on small houses costing many hundreds of thousands of dollars each and recent lessons have taught us that there is no real separation between governments and the banks.  Also, their commodity driven incomes are dependent on the apparent prosperity of China which is dependent on the consumption buying of Euroland and the USA.  It's one big global economic circle jerk.

So at this point, everyone in the world is insolvent and any actual foreclosure of the next guy will only bring to the forefront one's own insolvency.  Why do you think France and Germany are so interested in keeping the PIIGS from defaulting?  They know that the existing debt will lose value and that future debt fueled consumption by the PIIGS will plummet.  If this happens then the export driven scam economies of Germany and France will crash too.  PERIOD.  At the end of the day what will likely keep America on top is the size, technical capabilities and the global precrash deployment of its military.  No other country can touch that and if they try to do so then expect America to react in the name of national security.  At some point America can just allow the whole funny money system to collapse and then insist that the whole world continue to allow US to be its leader.  Or else.  In fact, this is pretty much what I expect will happen.  Why?  Because if I can think this up then the Pentagon has already figured it out 20 years ago.  They have thousands of people playing out "game scenarios" and planning for them in advance.  Nothing they do is random even though it's part of the big con for some things to appear unscripted.

In light of this, only a fool gives a damn what the S+P or any other credit rating system says about the US because it really is just sound effects in a theatrical show.  If you are tired of worrying about the global economy, the answer is pretty simple.  Stop reading the headlines, continue to work hard at productive enterprise and save any excess wealth you might earn into real money which is gold.  Do this month in and month out.  Do not try to use metals as a way to generate profits by trading them.  The house always wins that game.  Just dollar cost average your retirement savings into gold over the long term and you will easily beat the performance of the stock market and other scam ridden paper investments.  This message is especially pertinent to you if you are 40 years old or younger because you will certainly live long enough for any government driven gold price repression scams to collapse under their own corrupt weight.  The younger you are, the larger percentage of your retirement savings should be stored in gold. 

If you are 30 or younger you are completely safe in putting 100% of your  wealth into gold as a storage medium for your long term retirement funds.  Any "diversification" into fiat currency based paper assets will only be diworsification.  As you think about this, please consider the tax aspects.  When you sell your gold coins during retirement one at a time on Craigslist in order to eat and buy clothing each month, how is Uncle Sam going to collect capital gains taxes on that?  There is no way they can track those transfers between private individuals and even if they could there is no way they can assign a cost basis (i.e. what someone paid originally) because gold purchases today are completely un-trackable.  In fact, many states are now trying to write laws that legally exempt gold sales by individuals from state taxes!  If these laws go through then how many people will actually pay federal taxes on fake, inflation-induced "gains" on metal purchases?  Can the same thing be said of stocks and bonds?  Ummm, No.  The government tracks those paper assets completely and permanently.  You will be paying taxes on paper gains of paper assets.  Think about it. 

By the way, I am not advocating tax evasion in any fashion. I am simply observing the reality of the situation and speculating on what others will likely be doing.  I believe that unenforceable rules will eventually not be enforced and that the federal government will one day formally recognize the unenforceability of taxing fake, inflation driven capital gains on gold and silver in the same way that many states are working on as I type this.  At this point you can think of gold and silver as tax deferred investments in which the government will likely waive all taxation at some future point given that no economic value was added to the metal after your purchase.  The value of an ounce of gold does not go up simply because it takes more units of a debased currency in order to buy it.  An ounce of gold has always been worth exactly one ounce of gold, no more and no less.  It is immoral to tax something whose economic value (purchasing power) did not increase even though its dollar price went up due to government money printing operations.  I believe that governments of, by and for the people will eventually validate this view by eliminating taxation on these metals.

Don't worry about daily or weekly or even yearly price fluctuations of metals because that is the fiat currency value fluctuating, not the value of the metal.  Gold that was saved in 1920 still buys today what it bought back then.  Dollars that were saved in 1920, well, not so much.  In fact, those dollars have lost 96% of their purchasing power since then and in the next decade they will probably lose another 75-80% or more as the global fiat money scam continues to crater at an exponential rate.  If you want to do a little gambling, buy some silver too, but again, accumulate over time on a dollar cost averaged basis.  Silver is looking a little frothy right now and so a pullback (AKA buying opportunity) is not out of the question.  Then again, the metal might skyrocket to $100/oz before a pullback to $70 so if you want to get into silver the best advice is just to buy a set number of coins on a quarterly basis instead of throwing more good money after bad into your government controlled retirement account (IRA, 401k, etc.).  Anything controlled by government will eventually be revealed to be a massive scam, a trap.  Tax deferrals, corporate matches, etc. are nothing but bait.  On this point there should be no confusion or uncertainty.