[The Telegraph, U.K.]

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Jornal Do Brasil, Brazil

American Default and the End of 'Zero Risk'


"In terms of behavior, in the more than 200 years of American independence, the U.S. Treasury has never allowed a delay in payment on its bonds. In the case of a default, gone will be the beacon of zero risk. The global economy will be without a compass - adrift. As a consequence, the entire financial system, tied as it is to U.S. Treasury bonds, will be illiquid and experience a general crash."


By Sergio Sebold



Translated By Brandi Miller


July 26, 2011


Brazil - Jornal Do Brasil - Original Article (Portuguese)

House Speaker John Boehner gives a thumbs up as he passes members of the media, July 30.


PBS NEWS HOUR: Libertarian Congressman Ron Paul explains why he will vote against raising the debt ceiling, and why he has always voted against it, July 20, 00:10:36RealVideo

Ever since the Declaration of Independence, Americans have issued Treasury bonds - as all countries do. These securities are issued to meet the government's fiscal needs until in anticipation of tax receipts and other budget revenue. Such bonds, by their nature, are middle- and long-term, yielding a particular interest rate (generally speaking). Thanks to the behavior of American governments in the past, these bonds were always impeccably honored at maturity.


We live under the aegis of the capitalist model. That is, all enterprises entail business-oriented risks. Such risks may differ, ranging from that derived from a market collapse, administrative inefficiencies, disorganization, technical or technological obsolescence, etc. Thus, any business (if private) that requires investments from capital markets, faces risks derived from their economic activity. The word risk embodies the concept of “a condition with potential for damage or loss.” This, in turn, is an unplanned cost or expense that may or may not be recoverable. Risk is present in all financial market activity. This is a multidimensional concept that falls under four main groups: market risk, operational risk, credit risk and legal risk.


Speculative risks, by their nature, depend on the overall behavior of society, which depending on how people see the health of the economy, may need to weather variations between supply and demand; credit and liquidity; and changes in legislation, productivity and profitability, and even media. But the analysis must go deeper and take account of ethical considerations on the part of those involved in the breakdown of compliance with contract provisions. Everything is tied to a singular invisible force: mutual trust. Since human beings are fickle and inconsistent, we live perpetually under the threat of risk.  



The central concern of economic agents is invariably the risk inherent in financial liquidity. In other words in this case, when we agree to cover bonds until maturity, this is so-called cash flow. In any analysis of profitability, the risk of liquidity is invariably present. For comparison, we always use a parameter that serves as zero risk. That is, a financial asset that has no risk of non-payment at maturity. Those who work in the capital markets are well aware of this terminology. In terms of behavior, in the more than 200 years of American independence, the U.S. Treasury has never allowed a delay in payment on its bonds (aka/Treasuries). To market analysts, this has always been regarded as the sole zero-risk asset. It has served as a sound basis for all global investment, as well as providing security for liquidity in the global financial system.


[The Telegraph, U.K.]

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If in his “final mission” and with the permission of the American Congress, Obama is unable to avoid a default and stomach the monstrous deficit ($14 trillion), it will be the first time in history that America has gone into a default. Gone will be the beacon of zero risk. In other words, the global economy will be without a compass - will be adrift. As a consequence, the entire financial system, tied as it is to U.S. Treasury bonds, will be illiquid and experience a general crash. Will this be a global economic debacle? Will it be the beginning of a new global recession, as Paul Krugman (2008 Nobel Prize in Economics) warned over ten years ago?


*Sergio Sebold is an economist and graduate professor at Uniasselvi - Blumenau (SC)



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