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Thursday, May 6, 2010

Is the U.S. A Sub Prime Borrower?

Financial analyst Peter Schiff makes the comparison.

Euro Pacific Capital president Peter Schiff says it's better to have an inflexible currency — and that the ability to print money is making the U.S. a subprime borrower.

“The U.S. government is making the same mistakes that subprime borrowers made when (banks) were making teaser rates on their mortgages,” Schiff says.

“What happens if interest rates go up to 10 percent, which is half of what they were in 1980? All of a sudden, we’re paying $1.5 trillion a year (in interest),” Schiff told CNBC.

Sub prime was always a house of cards. It was done with no money down loans where income was stated but not verified. This lead to all sorts of fraud and abuse. On top of this, sub prime was almost exclusively financed by Adjustable Rate Mortgages. This house of cards was masked because the hot real estate market allowed for refinancing and sales before there was too much trouble.

That house of cards ended when people could no longer refinance and these ARM's adjusted up. The U.S. debt is financed by U.S. Treasury bonds. These are ARM's on steroids. In sub prime, these ARM's had fixed rates for 2, 3, and 5 years. U.S. Treasury bonds adjust day by day and minute by minute.

Schiff's point is that we are already over leveraged. Yet, rates are now low. Soon, we'll be financing 12-15 trillion dollars worth of debt at rates that are much higher. Our debt is already a house of cards. It's financed purely by our reputation. What will happen when that debt is financed at 6-8%? It could be the same trigger that ultimately doomed sub prime.

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