Defaulting banks - where will it stop?

[Jan Klimkowski]

In my post #111 above, an AFP article suggested the French & Germans want to end Switzerland's status as a tax haven.

Now, Obama is after British tax havens, including the Channel Islands.

Elite power games are, imo, definitely taking place out of sight of us proles:

Obama backs crackdown on tax havens

* Nick Mathiason and Heather Stewart
* The Observer, Sunday November 9 2008

President-elect Barack Obama plans to crack down on international tax havens, including Jersey, Guernsey and the Isle of Man, within weeks of taking power in January, putting him on a collision course with Gordon Brown.

There is growing international pressure to outlaw the secretive practices of tax havens as a key part of reforms to the world's battered financial system, as the leaders of the world's 20 most powerful economies gather for a major conference in Washington next weekend.

Britain has been notably lukewarm, but Obama, whose approval will be key to any reform package over the next 12 months, was one of the signatories of the Stop Tax Haven Abuse Act, legislation put to Congress last year that blacklisted Jersey, Guernsey and 32 other jurisdictions. Key aides to Obama said he will introduce a similar law as part of a wide-ranging revenue-raising and tax-reform package, within weeks of taking power.

Obama advisors estimate the measure could raise at least $50bn (£32bn) per year in lost US tax revenues, and Washington sources say leading accountancy firms have already hired lobbyists in anticipation of a fierce battle to water down the proposals.

Key measures are likely to include: revealing the beneficial owners of secretive trusts; prohibiting accountants from charging fees on specific tax services; and identifying 'offshore secrecy jurisdictions' that 'unreasonably restrict US tax authorities from obtaining needed information'. The measures could end years of financial secrecy that have protected the super-rich and international businesses as they move money from one jurisdiction to another.

Joe Guttentag, deputy assistant secretary for international tax in the Clinton administration and a key figure in the Obama campaign, is likely to drive the policy through, along with Professor Reuven Avi-Yonah, who helped frame the act. 'It is expected that something like this will happen,' Avi-Yonah told The Observer. 'There is a sense that if you can raise revenue by doing this, it will not be controversial.'

The measure comes as the UK faces international condemnation for blocking moves in the United Nations to upgrade its tax committee to intergovernmental status.

Brown has been keen to portray himself as the leader of efforts to reform the global financial system, boosting his credibility at home and distracting attention from the looming recession.

But as the Prime Minister prepares to set out his proposals for next weekend's conference in a speech at the Guildhall tomorrow night, anti-poverty campaigners will stage a noisy protest, urging him to 'call time on global greed'.

They fear Brown is too wedded to the light-touch regulation New Labour has championed for the past decade to be in the vanguard of a new economic system. 'Brown seems to have spent the past two weeks resuscitating the International Monetary Fund and refilling its coffers, so that it can lend on the same basis as the past 20 years,' said Nick Dearden, director of the Jubilee debt campaign. 'He doesn't seem to have done any soul-searching about how this crisis began.'

http://www.guardian.co.uk/business/2008/...-crackdown

[Peter Lemkin]

If it is true this Administration will really try to get rid of tax-havens for the rich, they are playing with 'fire' and will not long do so without a very nasty counter-attack from those who use them and wield very great power in the world and in the Deep Political World. I'd not expect Switzerland to change its banking practices anytime soon - nor any of the others, without a huge fight from the Oligarchy worldwide.

[Jan Klimkowski]

If it is true this Administration will really try to get rid of tax-havens for the rich, they are playing with 'fire' and will not long do so without a very nasty counter-attack from those who use them and wield very great power in the world and in the Deep Political World. I'd not expect Switzerland to change its banking practices anytime soon - nor any of the others, without a huge fight from the Oligarchy worldwide.

Indeed. These are Their tax havens, for black, laundered, looted, money.

My tentative interpretation is not that Obama is playing Robin Hood, and trying to clean up the international financial system. As Peter says, this would be suicide for Obama.

Not political suicide.

Literal suicide in a Crossfire.

My tentative interpretation is rather that certain elite factions are either in big trouble (eg Carlyle) or are trying to knock their rivals out of the game. Both Goldman Sachs & Deutsche Bank are reputedly just a couple of CDS mark-to-market transactions from collapse. GS are being propped up by "counterfeited" (see kiting post above) money borrowed from the Fed Reserve. Deutsche Bank are being desperately protected by certain German politicians.

In short, several elite players are in desperate need of huge lumps of cash to meet Basel-II solvency requirements, and they know there's plenty of black, laundered, cash sitting in tax havens. These elite players are now in a dog-eat-dog situation at best. As a last play of the dice, They are going after Their rival's laundered cash hoards stashed in the vaults of Caribbean, Swiss & Channel Islands' banks.

This is speculation of course.

[David Guyatt]

That's a might interesting hypothesis Jan. Switzerland, for example, has tons of "orphaned" accounts and accounts of crooks, tyrants and others overflowing with loot thanks to their theft of state assets while in office.

Ditto the CI's.

Could it that the game is for the banking community to finally get their grubby mits on all this cash?

What better way then putting pressure on the status of off-shore tax havens to secure "cooperation".

Gordo will not be amused at the attack on the CI's though.

[David Guyatt]

For a description of how these bankers launder drug money, all we have to do is read the explanation given to Nick Tosches by Michele Sindona:

Hey thanks very much Linda, that is exactly the extract I was talking about but was unable to access.

David

[Magda Hassan]

A few weeks ago there was a programme by one of our better makers of them and it was about the whistle blower at the Liechtenstein Bank that the Germans have bought their information from. You can watch the programme and read the transcript when you click the link below.
http://www.abc.net.au/4corners/content/2...381529.htm

What I also found most interesting was one of the people being investigated by the US for his involvement with off shore tax havens and undeclared monies was Frank Lowey one of our wealthiest businessmen (Westfield shopping centres) As far as I can recall investigations are still ongoing and not looking good. In the mean time he has been elected to board of the Reserve bank here.

[Linda Minor]

In my post #111 above, an AFP article suggested the French & Germans want to end Switzerland's status as a tax haven.
Now, Obama is after British tax havens, including the Channel Islands.
Elite power games are, imo, definitely taking place out of sight of us proles:

Joe Guttentag, deputy assistant secretary for international tax in the Clinton administration and a key figure in the Obama campaign, is likely to drive the policy through, along with Professor Reuven Avi-Yonah, who helped frame the act. 'It is expected that something like this will happen,' Avi-Yonah told The Observer. 'There is a sense that if you can raise revenue by doing this, it will not be controversial.'
http://www.guardian.co.uk/business/2008/...-crackdown

Who are these guys?

httphttp://www.oecd.org/speaker/0,3438,e...00.html://

Joseph H. Guttentag
...He was a senior tax partner with the law firm of Arnold & Porter in Washington and Tokyo.
He has been the chairman of the international tax groups of the American Chamber of Commerce in Japan, the U.S. Chamber of Commerce and the American Bar Association.
He was a member of the Executive Committee of the American Society of International Law and served as its Treasurer. He has taught at Harvard Law School and the George Washington University Law School.
He is a graduate of the University of Michigan and Harvard Law School, where he was an editor of the Harvard Law Review.

http://hsgac.senate.gov/public/_files/ST...hUofMI.pdf

"PREPARED TESTIMONY OF REUVEN S. AVI-YONAH, IRWIN I. COHN PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN LAW SCHOOL BEFORE THE US SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, HEARING ON OFFSHORE TRANSACTIONS AUGUST 1, 2006
...No one, including the IRS, has a good estimate of the size of the international tax gap. This is not surprising given that the activities involved are illegal, but one can make an educated guess based on a few publicly available numbers. In 2003, the Boston Consulting Group estimated that the total holdings of cash deposits and listed securities by high net worth individuals in the world were $38 trillion, and that of these, $16.2 trillion were held by residents of North America. Out of these $16.2 trillion, under 10 percent was held offshore (as compared with, for example, 20-30% offshore for Europe and 50-70% offshore for Latin America and the Middle East).5
If one translates this estimate into approximately $1.5 trillion held offshore by US residents, and if one assumes that the amount held offshore earns 10% annually, the international component of the tax gap would be the tax on $150 billion a year, or about $50 billion. This figure is in the mid range of estimates of the international tax gap in 2002 by former IRS Commissioner Charles O. Rossotti ($40 billion) and by IRS consultant Jack Blum ($70 billion).6 As an order of magnitude, an estimate of $50 billion for the total international tax gap (for each tax year) appears congruent with the $3.2 billion actual recovery by the IRS from a single Cayman bank (for multiple tax years)....

e. Sanctions on non-cooperating tax havens.
In the case of non-cooperating tax havens, I support the US Treasury using its existing authority to prospectively deny the benefits of the portfolio interest exemption to countries that do not provide adequate exchange of information.11 This step is necessary, in my opinion, to prevent non-cooperating tax havens from aiding US residents to evade US income tax.
A principal problem of dealing with tax havens is that if even a few of them do not cooperate with information exchange, tax evaders are likely to shift their funds there from cooperating jurisdictions, thereby rewarding the non-cooperating ones and deterring others from cooperation. Thus, some jurisdictions have advertised their refusal to cooperate with the OECD efforts.
However, if the political will existed, the tax haven problem could easily be resolved by the rich countries through their own action. The key observation here is that funds cannot remain in tax havens and be productive; they must be reinvested into the rich and stable economies in the world (which is why some laundered funds that need to remain in the havens earn a negative interest rate). If the rich countries could agree, they could eliminate the tax havens’ harmful activities overnight by, for example, refusing to allow deductions for payments to designated non-cooperating tax havens or restricting the ability of financial institutions to provide services with respect to tax haven operations.
The EU and Japan have both committed themselves to tax their residents on foreign source interest income. The EU Savings Directive, in particular, requires all EU members to cooperate in exchange of information or impose a withholding tax on interest paid to EU residents.12 Both the EU and Japan would like to extend this treatment to income from the US. Thus, this would seem an appropriate moment to cooperate with other OECD member countries by imposing a withholding tax on payments to tax havens that cannot be induced to cooperate in exchange of information, without triggering a flow of capital out of the US...."

Gordon Brown said on PM Question Time last week that he is coming to U.S. next week to talk to both George Bush and to Senator/Pres.-Elect Obama. I wonder if this is what he'll be conferring about.

[David Guyatt]

The EU Savings Directive, in particular, requires all EU members to cooperate in exchange of information or impose a withholding tax on interest paid to EU residents.12 Both the EU and Japan would like to extend this treatment to income from the US.

Europe, Japan an the US are the Trilateral Commission nations. This then very clearly explains Obama's latest move. Obama is a Trilat president (witness Bzrezinski being his foreign policy adviser) as was Jimmy Carter and, therefore, this looks to be a Trilateral Commission policy.

[Peter Lemkin]

Scrawny Geese; No More Golden Egg

Scenes From the Global Class War

By Dr. Michael Hudson

Counterpunch

October 27, 2008

On Friday, October 24, the pound sterling dropped to just $1.58 (down from $1.73 earlier in the week, an enormous plunge by foreign-exchange standards), and the euro sunk to just $1.26, while Japan’s yen soared by 10 per cent. These shifts threatened to disrupt export markets and hence industrial sales patterns. Global stock markets plunged from 5 to 9 per cent abroad, and there was talk of closing the New York market if stocks fell more than 1,000 points. Pre-opening trading saw the Dow Jones Industrial Average down the maximum limit of 550 points (largely on foreign selling) before bounding back to lose “only” 312 points as the dollar soared against European currencies.

Friday’s currency turmoil and stock market plunge was a case of the chickens coming home to roost from the class-war policies being waged by European and Asian industry and banking squeezing their domestic consumer markets – that is, labor’s living standards – in favor of export production to the United States. The internal contradiction in this industrial and financial class warfare is now clear: To the extent that it succeeds in depressing labor’s income, it stifles the domestic consumer-goods market. This disrupts Say’s Law – the principle that “production creates its own demand,” based on the assumption that employees will (or must) be paid enough to buy what they produce.

This has not been true for many years in Europe and Asia. But production has been able to continue without faltering because of an international deus ex machina: consumer demand in the United States.

This is not to say that no class warfare is being fought in the United States. Indeed, living standards for most wage earners today are down from the “golden age” of the late 1970s. But the U.S. economy had its own financial deus ex machina to soften the blow: Alan Greenspan’s asset-price inflation that flooded the banks with credit, which was lent out to homebuyers and stock market raiders. Rising home prices were applauded as “wealth creation” as if they were a pure asset, much like dividends suddenly being awarded to one’s savings account. Homebuyers were encouraged to “cash out” on the rising “equity” margin, the (temporarily) rising market price of their homes over and above their (permanent) mortgage debt. So while most mortgage money was used to bid up the price of home ownership, about a quarter of new lending was reported to be spent on consumption goods. Credit card debt also soared. In the face of a paycheck squeeze, U.S. consumers were maintaining their living standards by running further and further into debt.

This could not go on for very long. It never has. Debt-financed bubbles can’t last for more than a few years, even when fueled by a self-feeding inflation of asset prices in which households and corporate industry borrow more and more against the rising price of their collateral. But once the housing bubble burst the game was up.

The game was up was up not only for the U.S. economy, but also for foreign economies that had geared their industrial production to serve the U.S. market rather than their own home markets. A global industrial slowdown is now threatened, and must continue until foreign domestic markets are nurtured – just the opposite trend from the recent generation of neoliberal anti-labor policies.

To understand the dynamics at work, one needs to look at the balance of payments – not so much the balance of trade itself, but the currency speculation, international lending and arbitrage that has dominated exchange rates over the past two decades. Exchange rates no longer reflect relative wage levels, “purchasing power parity” or living costs as in times past. Today, they reflect the flow of international borrowing where interest rates are low and lending at a markup where credit is tight – and then hedging this arbitrage, and jumping on the bandwagon to speculate on which way currencies will go.

In this way the balance of payments and currency values have been “post-industrialized” just as domestic economies themselves have been. Instead of promoting industrial growth based on a thriving home market, governments throughout the world have pursued a “post-industrial” financial strategy of “wealth creation.”
Japan’s yen crisis – payback for the “carry trade”

Nowhere has this been more the case in Japan, whose economy has remained in the doldrums ever since its bubble burst in 1990. For seventeen years straight, quarter after quarter, Japanese land prices fell, and so did stock market prices – and hence, the collateral pledged as backing for loans. This quickly left Japan’s banks with negative equity. The Bank of Japan’s response was to devise a way for them to rebuild their balance sheets – to “earn their way” out of the bad loans they had made.

The policy was not to revive the faltering domestic market in Japan or its industrial corporations. From 1945 through 1985, Japanese had a model industrial banking system. But in 1985, U.S. diplomats asked Japan to please commit economic suicide. Angered by the striking success of Japanese industry, U.S. officials asked their compliant Japanese counterparts to raise the yen’s exchange rate so as to make its industrial exporters less competitive, and in due course to flood its own economy with credit so as to lower interest rates, thereby enabling the Federal Reserve to flood the U.S. market with enough cheap credit to give a patina of prosperity to the Reagan Administration. This policy – announced in the Plaza Accord of 1985 – led economist David Hale to joke that the Bank of Japan was acting as the Thirteenth Federal Reserve District and the Japanese government as the Republican Re-election Committee.

Japan flooded its economy with credit, lowering interest rates and fueling the world’s largest real estate bubble of the 1980s. The stock market also soared to reflect the rise in Japanese industrial sales and earnings. But after the bubble burst on December 31, 1989, the mortgage debts and stock that that Japanese banks held in their capital reserves fell short of the valuation needed to back their deposit liabilities. To help bail out the banks, Japan’s government urged them to engage in what has become known as the “carry trade”: lending freely created yen credits to foreign financial institutions at remarkably low rates, for these borrowers to convert into other currencies to buy bonds or other assets yielding a higher rate. If the domestic Japanese market lacked credit-worthy borrowers, let them lend to foreigners. As a new source of revenue for the banks in place of loans to domestic real estate and industry, low interest rates enabled them to flood the global economy with credit. This served global finance by providing speculators and “financial intermediaries” with an opportunity to get a free arbitrage ride.

Borrowing rates remained high within Japan itself. As veteran Japan watcher Richard Werner (author of Princes of the Yen) recently described the situation to me, “while Japanese small firms were killed by the continued refusal of banks to expand credit (and many a small firm president was killed by having to sell a kidney to the loan sharks he was forced to resort to), foreign speculators received ample yen funds for a pittance.” The silver lining to this credit creation was that Japanese exporters were aided as the conversion of yen into foreign currencies drove down the exchange rate. (Yen credit was “supplied” to global currency markets, and was spent to buy and hence bid up the price of euros, dollars, sterling and other currencies.)

So the yen remained depressed, helping Japanese sales of consumer goods, while foreign borrowers were enabled to ride their own wave of asset-price inflation. Speculators could borrow at only a few percentage points interest in Japan, and convert their debt into foreign currency and lend to equally desperate countries such as Iceland at up to 15 per cent.

Hundreds of billions of dollars, euros and sterling worth of yen were borrowed and duly converted into foreign currencies to lend out at a markup. Arbitrageurs made billions by acting as financial intermediaries making income on the margin between low yen-borrowing costs and high foreign-currency interest rates. As Ambrose Evans-Pritchard wrote over a year ago in the Financial Times, “the Bank of Japan held interest rates at zero for six years until July 2006 to stave off deflation. Even now, rates are still just 0.5 per cent. It also injected some $12bn liquidity every month by printing money to buy bonds. The net effect has been a massive leakage of money into the global economy. Faced with a pitiful yield at home, Japan's funds and thrifty grannies shoveled savings abroad. Banks, hedge funds, and the proverbial Mrs Watanabe, were all able to borrow for near nothing in Tokyo to snap up assets across the globe. BNP Paribas estimates this "carry trade" to be $1,200bn.”

All this was conditional on the ability of lenders to get a continued free ride. Now that the free lunch is over, Japan’s postindustrial mode of rescuing its banking sector is coming home to roost. It is doing so in a way that highlights the inherent conflict between finance capitalism and industrial capitalism. Whereas industrial expansion is supposed to keep going – and can continue to do so as long as markets keep pace with production – debt bubbles end, usually abruptly as we are seeing today. Now that Iceland has gone bust, Hungary looks like it is following suit.

As global currency markets no longer provide the easy pickings of the last decade, the yen carry trade is being wound down. This involves converting Icelandic currency, euros, sterling and other non-Japanese currencies back into yen to settle the debts owed to Japanese banks. This repayment – and hence re-conversion into yen – is pushing the yen’s price up. This threatens to make Japanese exports higher-priced in terms of dollars, euros and sterling. Last week, Sony forecast that its earnings will fall as a result, and other Japanese companies face a similar squeeze in sales, not only from rising yen/dollar prices but from the global slowdown resulting from two decades of pro-financial anti-labor economic policies.

Evans-Pritchard rightly accused the world’s central banks of having created this mess. “It was they – in effect governments – who intervened in countless complex ways to push down the price of global credit to levels that warped behavior, as the Bank for International Settlements (BIS) has repeatedly noted. By setting the price of money too low, they encouraged debt and punished savings. The markets have merely responded with their usual exuberance to this distorted signal. Private equity was tempted to launch a takeover blitz at a debt-to-cashflow ratio of 5.4 because debt was made so cheap. The US savings rate turned negative because interest rates were held below inflation.” He should better have said, asset-price inflation. Gains for wealth-holders at the top of the economic pyramid polarized economies. What was rising for the bottom 90 per cent was debt, not asset-price gains from easy money.

Financing the U.S. “trickle-down” economy from below

The soaring yen and plunging foreign currency rates are the result of unwinding the Japanese “carry trade” strategy to rescue its banks. Japanese industry will pay the bill. And despite the fall in sterling and the euro, Europe’s policy of emphasizing exports to the American market rather than to sell to its own domestic labor force looks pretty bad in view of the imminent economic slowdown in store. U.S. consumer spending and living standards will have to fall – and it seems, to fall sharply – in order to finance the “trickle down” economy at the top. Current Treasury policy is to bail out the creditors, not the debtors. The banks are being saved, but not U.S. industry, and certainly not the U.S. wage earner/consumer. Instead of pursuing a Keynesian type of deficit spending in a manner that will increase employment (government spending on goods and services, infrastructure spending and transfer payments), the Treasury and Federal Reserve are providing money to the banks to buy each other up, consolidating the U.S. financial system into a European-type system with only a few major banks. The financial system is to become monopolized and trustified, reversing two centuries of economic policy aimed at preventing financial dominance of the economy.

None of the money being given to the banks really will trickle down, of course. Instead, the largest upward transfer of property in over seventy years will occur. The policy of giving money to the wealthiest sectors – these days the financial sector – turns the trickle-down economy into a euphemism for the concentration of wealth. The pretense is that America’s economy needs the financial and property overhead in order for the “real” economy to “take off” again. But a stronger financial sector selling yet more debt to the economy at large threatens to deter recovery, not to speak of a new takeoff.

Seeing the imminent shrinkage of the U.S. market, lenders and investors are dumping their shares, not only those of U.S. firms but also stocks in European and Asian export sectors. This is the “inner contradiction” of today’s financial rescue operation. Finance itself cannot survive in the face of a stifled domestic “real” economy.

So the world ought to be at an ideological turning point. But the last thing that Europe’s oligarchy wants to see is higher labor standards. Nor does the U.S. financial class. Europe and Asia put their faith in a U.S. consumer-goods market rather than their own. The U.S. financial sector found this appealing as long as consumption was financed by running into debt, not by workers earning more money or paying lower taxes. Industrial and political leaders throughout the world have been so anti-labor that there is little thought of raising domestic living standards via higher wage levels and a tax shift off labor and industry back onto property where progressive tax policies used to be based.

Here’s why it is impossible to go back to the past, as if this were some kind of normal condition that can be recovered. When Alan Greenspan flooded the mortgage market with credit, homeowners borrowed against (“cashed out” on) the rise in housing prices as if their homes were a piggy bank. The difference, of course, is that when one draws down a bank account there is less money in it, but no debt is involved to absorb future income in repayment schedules. “Equity loans” have left a debt residue, which now has turned into negative equity with loans still needing to be repaid. This will leave less for consumption. So U.S. consumer spending will fall because of (1) no more easy mortgage or credit-card credit, (2) debt deflation as consumers repay past borrowing, “crowding out” other forms of spending, and (3) downsizing and job losses lead to falling wage income.

Lower consumer spending means less sales by U.S. and foreign manufacturers – especially those in countries whose currency is rising against the dollar (e.g., Japan). Lower sales mean lower earnings, which mean lower stock prices. And in the stock market itself, price/earnings ratios are falling as the credit that fueled stock-market speculation by hedge funds and other arbitrageurs is cut back. So the combination of falling price/earnings ratios and falling earnings mean less in the denominator (earnings) to be multiplied into prices (earnings capitalized at the going interest rate).

Declining stock market prices are reducing the coverage of corporate pension funds (as well as personal retirement accounts), requiring higher set-asides to fully fund these accounts. In the face of tightening bank credit, this will cut back new corporate spending on plant and equipment, further slowing the economy.

As foreign exporters are rudely awakened the dream of an American demand, when will the point come at which Europe and Asia seek to build up their own domestic consumer markets as an alternative? The first problem is to overcome the ideological bias in which central bankers are indoctrinated, in a world where politicians have relinquished economic policy to bankers trained in Chicago School financial warfare against labor and even against industry. It probably is too much to hope that today’s European central bankers and kindred economic managers will drop their neoliberal anti-labor ideology and see that without a thriving domestic market, their own industrial firms will languish. The solution must come from a revived political sector representing the interests of labor, and even of industry itself as it sees the need to revive domestic markets.



Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

[Jan Klimkowski]

Interesting that a site as MSM as CNBC is printing speculation that the US may be about to lose its AAA rating.

However, if the recent performance of the ratings agencies is anything to go by, they'll downgrade the US about a week after a formal default.

US May Lose Its 'AAA' Rating

The United States may be on course to lose its 'AAA' rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.

"The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system" and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

"In the United States there is already a funding crisis, and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off," Hennecke told CNBC.

In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.

As for a stimulus package, there is not much of an industry left to stimulate back into life, Hennecke said.

http://www.cnbc.com/id/27641538