Central Banks Prepare

October 15, 2013 (San Diego) We we inch closer to the default Der Spiegel reports the following:

Central banks are currently preparing to appear before a similar scenario as in 2008. At the annual meeting of the International Monetary Fund ( IMF ), the top decision makers of the major central banks have already discussed options for action for the worldwide crash of information to the news agency Bloomberg.

That the United States would have their financial dispute in the past always defused in time, be absolutely no reason not to prepare for the worst case, citing Bloomberg Jon Cunliffe, the future Vice-Governor of British central bank. “I would expect that the Bank of England is planning for this case. I would expect that all actors in the private sector do this, in all other countries.” 2008 presented the central banks on a large scale emergency liquidity provider and stretched safety nets in order to provide each other with money.

The nightmare scenario will come, in my view. This is what it is, and most Americans are too sheltered to understand that this is leading to at the very least major preparations and loss of trust in the United States. Sooner or later these crisis, assuming this is solved before zero hour, will lead to the absolute end of trust.

Moreover, Fitch has recommended negative on the US Debt AAA rating. Baron’s is not the only one to report on this news, as it broke this afternoon, but their analysis is spot on. You can also go read the whole letter by Fitch here. The high drivers need to be quoted though, since these are critical, and may lead to a downgrade regardless.

– The U.S. authorities have not raised the federal debt ceiling in a timely manner before the Treasury exhausts extraordinary measures. The U.S. Treasury Secretary has said that extraordinary measures will be exhausted by 17 October, leaving cash reserves of just USD30bn. Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.

– Although the Treasury would still have limited capacity to make payments after 17 October it would be exposed to volatile revenue and expenditure flows. The Treasury may be unable to prioritise debt service, and it is unclear whether it even has the legal authority to do so. The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens – all of which would damage the perception of U.S. sovereign creditworthiness and the economy.

– The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This “faith” is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.

So here is where we are. We are about twenty four hours from actually going over the ceiling. While effects will not be immediate, they will be felt. The end of the US Dollar as a reserve currency is a real possibly, with the attendant hyperinflation. This is also leading to further destabilization of the United States.

This is indeed a moment in time, that will determine the fate of the nation. Yes, it is that dramatic.

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