Greece Distracting from Real Debt Crisis in U.S.

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Greece Distracting from Real Debt Crisis in U.S.

The current sovereign debt crisis in Greece and the potential for euro-zone countries to bailout the nation, has created a rush out of the Euro, which in October became the currency of choice for foreign central banks adding to their reserves. The declining Euro has added fuel to the strengthening U.S. dollar, and the ill-conceived notion that as bad as things are in the U.S., it’s worse everywhere else and with the U.S. economy beginning to recover, Europe will be next to experience the financial crisis we experienced in 2008.

Unlike the U.S., the nation of Greece doesn’t have their own printing press and the ability to create Euros out of thin air, in order to avoid default on their debt. While Greece’s debt rating is currently an A2 with a negative outlook, the U.S.’s debt rating remains at AAA, despite the fact that the U.S.’s national debt (including unfunded liabilities) is currently 600% of GDP. If the U.S. was a corporation instead of a nation, its credit rating would be junk.

We hope that Greece doesn’t get bailed out, because a bailout would cause foreign investors to become more irresponsible than ever and create even greater moral hazards. Unfortunately, not only is it likely that Greece will get bailed out, it’s possible our own Federal Reserve will get involved. The U.S. Federal Reserve has the ability to make loans to foreign central banks without disclosure to the U.S. public. European banks have already benefited $50 billion from the U.S.’s bailouts of AIG, so it’s not out of the realm of possibility that the Federal Reserve will intervene due to euro-zone countries being key U.S. trading partners.

Greece’s budget deficit is currently 12.8% of their GDP, only slightly higher than the U.S.’s projected deficit as a percentage of GDP this year of 10.64%. Greece’s economy is roughly 1/5 the size of California’s economy and while Greece makes up just 3% of the total euro-zone GDP, California makes up 13.5% of the U.S. GDP. If the potential default of Greece is causing a flight from the Euro, imagine what is going to happen to the U.S. dollar later in 2010 if the state of California nears default. Just like Greece, California can’t print money on their own.

We believe the U.S. dollar will ultimately win a race to the bottom with the Euro, but the only real winners (as far as retaining purchasing power) will be gold and silver. Although precious metals have declined during the recent weeks with a weakening Euro and strengthening U.S. dollar, gold and silver will soon benefit from a complete loss of confidence in western fiat currencies.

Many economists are beginning to call the Euro a failed experiment, because of the problems in Greece. A fiat U.S. dollar has only been around for 28 more years than the Euro. Fiat currencies are the root cause of all the economic problems in the U.S. and Europe. NIA believes all fiat currencies will be looked back at as failed experiments.

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