This article was published by The McAlvany Intelligence Advisor on Wednesday, November 15, 2017:
Marxist Dictator Nicolas Maduro’s Venezuela owes the world an estimated $140 billion. It’s greatly diminished economy, thanks to his socialist policies, generates barely $400 billion in output. That puts its debt-to-GDP ratio at 35 percent.
The United States government, if government agencies are to be believed, owes $20 trillion, with about a quarter “owed to itself” (i.e., Social Security) and the balance “publicly held” by investors, bond funds and banks. That means that the debt-to-GDP ratio is about 75 percent.
Here’s the rub: all three credit agencies on Monday dropped Venezuela’s debt rating to “selective default” – meaning that Maduro has already missed some interest payments when they were due and is likely to miss some more very shortly. In the U.S., however, those same agencies rate government securities at AA – investment grade, just one notch below its top rating.
It gets worse. According to Boston University Professor Laurence Kotlikoff, the real amount owed by the U.S. government on a “generational accounting” basis, is more than $200 trillion.
Those agencies must consider that since Venezuela is so small – a population of just one-tenth that of the U.S., and an economic output one-fiftieth of the U.S. – that the comparison must not be fair. After all, Venezuela has suffered under various dictators in the past and has defaulted frequently under them while the U.S. hasn’t even come close (except while under phony threats to “shut down” the government).
But applying common sense – something apparently missing from both the credit agencies and the various governmental entities reporting on such things – means that the U.S. is in desperately worse condition than Venezuela.
But no one seems to care. All the media are reporting is that Maduro tried to fool some of his investors into thinking that he was serious about repaying them during a 25-minute meeting held on Monday in Caracas. It was a laugher. One observer of the 25-minute long meeting, Raymond Zucaro of RVX Asset Management which trades in global securities, said “Nothing of substance happened.”
That’s not quite accurate. It did give Maduro one more opportunity to make it appear not only that he was trying – really trying – to make those payments, but that nasty ogre, the U.S. (and especially its current ruling monarch, Donald Trump) was preventing him from doing so. Jan Dehn, head of research at Ashmore Investment Management, was quite correct: “[Maduro] can say, ‘Well, look, I tried. I showed good will, the bondholders showed good will … everybody tried to get together but unfortunately because Uncle Sam is not playing ball, we can’t do it.”
What followed the meeting may turn out to be the end of Maduro: the defaults trigger “cross-default” provisions that allow creditors and bondholders to begin the process of seizing Maduro’s assets including his oil company PdVSA and other state-held assets. This could set off a legal scramble similar to starving coyotes attacking a downed antelope, hoping just to get a small piece of the carcass before it disappears altogether.
Notably missing from Monday’s faux bondholder meeting in Caracas were representatives from Russia or China to whom Maduro also owes billions. Russia has been keeping Maduro alive by trading oil assets at huge discounts for cash, qualifying Russia as being one of the first coyotes to seize the opportunity to attack Maduro’s carcass.
Without further sustenance from his communist and Marxist allies, Maduro is done for, likely with extreme prejudice. If history is any guide, however, the international bankers will make sure that the incoming administration will honor their debts: they always get paid.
At the moment attention is on Venezuela’s default and rapidly accelerating slide into oblivion. In the U.S. the bond market continues to thrive as if nothing is amiss.
For the moment.
MarketWatch: Venezuela in default on interest payment, S&P says
Laurence Kotlikoff: “The US Fiscal Gap Is $200 Trillion… Our Country Is broke”