9th June 2016

Raghuram Rajan MUST switch from US treasuries to gold or Bitcoin asap. Trump WILL give the world a haircut. The US has NO OPTION but to default.

The US government debt ceiling is $14 TRILLION. Total debt including unfunded social security liabilities is up to $90.6 TRILLION.

Of this, the Fed holds $2.4 TRILLION and foreigners hold $6.3 TRILLION. India is currently the world’s 12th largest holder of the US government debt to foreigners – at appx. $120 billion. This is around one-third of India’s foreign exchange reserves.

In this low interest environment – of close to zero per cent – the US Government pays $400 billion in interest costs each year. The moment interest rates get closer to normalcy, the US will (MUST) default on its debt. There is simply no way to normalise interest rates in the USA without doing that.

Either the USD must collapse or the US must default on Treasuries.

Donald Trump has already a plan for default. Since more than half the US debt is held by the Fed and foreigners, it is politically much easier for the US to default, than to depreciate the dollar.

Most likely the US will default on foreign debt first, since that is the most politically palatable. But an increase in interest rates will involve both default and a depreciation of the USD.

Remember, God did not create US Treasuries. These are just pieces of PAPER. They are a promise by the US Government to pay a certain amount of dollars at a particular date. And we know that most governments have defaulted on their debt in the past, since governments tend to rack up huge borrowings, given the public choice incentives at work.

The US has defaulted as recently as in 1971, when it stopped fulfilling its promise to convert Treasuries into gold.

This time the US will default on ALL its foreign debt.

I agree entirely with Peter Schiff on this (his analysis is usually rooted in very sound economics).

It is high time Raghuram Rajan converts the US Treasuries RBI holds into gold or Bitcoin. He should also convert a portion of USD holdings into gold.

Yes, he should diversify – including into Bitcoin – given the 100 per cent certainty of US default. He could slowly shift around a quarter of the US Treasuries into Bitcoin, and the rest into gold.