The US is Lurching Towards Default
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By Graham Summers
The US is once again at its Debt Limit.
Despite all of the talk of cutting the deficit and the like, the political class continues to throw taxpayer money around at a pace that is bankrupting the nation.
To whit: the US is set to hits its debt ceiling AGAIN on March 16 2015.
It’s remarkable that the first we hear of this is exactly one week before the date. You would think that the US hitting its debt limit would actually matter to the mainstream media and financial pundits since we’re already sporting a Debt to GDP ratio of over 100%.
Yep, we’re at the level associated with being bankrupt. Check out the vertical leap in debt issuance since the recession ended in 2009.
True, the US also increased its debt load substantially after the recession in the early ‘80s. However, at that time we’re talking about an increase in Debt to GDP from 30% to 50% that took place over a decade. We’veexceeded this 20% growth in Debt to GDP in half the time this go round.
Moreover, with a Debt to GDP ratio anywhere north of 80%, you’re at the point at which you’re going to be issuing new debt to pay back old debt.
This is precisely what happened in October and November of last year: the Federal Government issued $1 trillion in new debt… because it didn’t have the money to pay back old debt that was coming due. That’s just $1 trillion.
This brings us once again to the biggest problem in the financial system today: the bond bubble.
Globally the bond bubble is north of $100 trillion. And this $100 trillion has been used as collateral for a derivative market that is well north of $555 TRILLION.
In the current financial system, debt is money. And at the top of the debt pyramid are sovereign bonds: US Treasuries, German Bunds, Japanese Government Bonds, etc. These are the senior most assets used as collateral for interbank loans and derivative trades. THEY ARE THE CRÈME DE LA CRÈME of our current financial system.
The coming crisis will not be another 2008. It will be something much much worse. The 2008 Crisis was caused by an implosion of the Credit Default Swap market. At that time, the entire CDS market was roughly $50-60 trillion in size.
The interest rate based derivatives market is TEN TIMES larger in size: north of $555 trillion.
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