US government default: Federal govt.

Governments have two major advantages. One they have an unlimited scope for income – agricultural tax, excise duty, service tax, income tax, estate duty, etc. The more worrisome advantage is their ability to print currency notes. Ask Ben Bernanke – he converts coniferous trees into billions of dollars!

The worry is for people who lend to the governments.

As the government can print its own money – it just prints a $ 100 note and tells you that this is “worth $ 100” and we have to believe it! It is not possible for a private sector guy to do it.

What I mean is simple – when the Japenese investor in 1985 (or thereabouts) invested in US bonds, he was told that the $ is worth about 300 Yen. He felt happy.

Now (if it is a 30 year bond it will mature in 2015) he is being told that the $ is worth about 100 Yen. If the present trend continues (which I do not argue against or fully agree with) the $ may be worth 90 Yen.

Thus the Japenese investor HAS already lost 66% of his capital. If this is not a default, it is purely technical! So God bless the investor!

And worse may still be coming – Alan Greenspan says – there are more defaults in the US banking system. So now you know why some banks are not going to sleep! Could it be merrill? Could it be Citibank? What about JP Morgan ? Or Morgan Stanley? One shudders…

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