A brief note about the evolving world financial crisis - Yes !! we do believe in evolution !!!

Editor notes: Midknight Review spends a little time each day listening to FoxBusinessNews and CNBC, reading Bloomberg, Financial Times and the WSJ. While we are profoundly "layman," those to whom we turn are not. Here is what is being said with regard to the current situations in.

Greece has had its bond status reduced to "junk bond" status. They are currently paying 18% on their bond sales. That means that Greece is having to offer 18% interest to attack cash inflow to the country. By comparison, the US offers 3.89 % on its 10 year bonds and 4.74% on its 20 year bonds. If our country's credit status is downgraded from AAA to AA, the United States will be forced to offer 6 and 7 percent interest on its T-bonds sales. Such a move would create interest payment totals that would cost ALL of the revenues brought into the Nation's coffers via income tax. Currently we are spending about 40% of income taxed revenues on interest payments.

The financial news of the morning is not good. Spain has joined Greece in credit status downgrade. While Greece is at "junk bond" status, Spain has been downgraded from AA+ to a straight AA. Portugal was recently downgraded as well and is on its way to junk bond status, also.

There is the fear that the current financial situation in Europe is putting additional pressure on the economies of Italy, France, Ireland, Germany and even Britain. In all this, the euro is taking a hit while the dollar has gained some ground against the euro. The combined total of near term treasury bond funding put out by Spain, Portugal and Greece is a 1.2 trillion. Many believe that the interest payments on this total is critical to the financial health of the European collective, especially Germany, Switzerland, France and Ireland, countries vested in the bond crisis of Spain, Portugal and Greece.

Midknight Review believes that all the talk of "downgrade" with regard to the US, concerns itself with a possible event that is [perhaps] two years removed. There is a trigger that brings our credit rating down from AAA to a AA+ rating that has nothing to do with the mere passing of time. When our debt management effort (interest and principle payments) exceeds 14% of our GDP, BAM !!, we drop to AA+ status and the interest we will have to offer will [approximately] double to 7 or even 8 % on ten year notes.

Anyway, there you have it -- a brief review of the biggest European news story of the day. -- jds

Post script: understand that the key factor in avoiding a reduction in our credit status is not spending but the relation of debt management (interest and principle) to the GDP. If our nation can get back to the job of producing goods and services, the US can stay ahead of the threat. increasing GDP is a critical first step. In spite of Bush's record spending, he was able to keep that spending within 40% of GDP totals. Obama is nearing a 60% ratio on his way to 100% (at current spending rates). Do not forget that the Bush 10 year projection total is 4 trillion while Obama's 10 year projection is at 26.4 trillion !!! We do not pretend that this level of spending will continue but it is safe to argue that Obama will out spend Bush by 300% if best estimates are accurate (i.e. 12 trillion over a 10 year period without healthcare factored into the mix).

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