“Let me distinguish between professional politicians and the public at large,” opined the president during a press conference yesterday.
“The public is not paying close attention to the ins and outs of how a Treasury auction goes…
[_EMBED1] Move along, nothing to see here…
“We’re paid to worry about it.”
Never mind professional politicians are the reason we have a debt problem in the first place.
So you have a choice today, dear reader: Follow the president’s advice and don’t worry about the backdoor debt ceiling deal they’re cooking up inside the Beltway… or read on and prepare yourself for the consequences of what the “professional politicians” have wrought.
“I’d love to see the size of the US bubble,” a reader writes after yesterday’s issue, “and where it would fit on the debt-to-GDP chart. Can you add that [your next post]?”
Yes, it’s big bubble indeed. In fact, it spills past the margins of the chart we shared with you yesterday. Here, we’ve superimposed a yellow circle representing the United States:
The US national debt is 5.5 times that of Italy – the largest debt in the eurozone and the cause of so much consternation in the markets this week.
But the real story lies in the center of the yellow circle on this chart.
First, check out the bottom scale, plotting each nation’s debt-to-GDP ratio: With a $14.3 trillion national debt and a $14.7 trillion economy, the US debt-to-GDP ratio is just shy of 100% – near Portugal-Italy territory, though not as bad as Greece.
Then there’s the left scale: credit default swaps – the “insurance policies” paid by the buyers of these nations’ government debt to cover themselves in the event of a default.
The total amount of US credit default swaps outstanding is low, relative to many European countries. But at $4.58 billion, it’s nearly the same amount of credit default swaps outstanding on Lehman Bros. in 2008.
As you might recall, roughly $4.5 billion in default swaps was enough to wipe out AIG, then the world’s largest global insurance firm… with the requisite unassailable record.
Perhaps those memories are weighing on the minds of credit default swap traders. The higher the cost of a credit default swap, the higher the implied risk.
The cost of insuring against US government debt, while still low, has grown significantly since mid-May.
As of yesterday, it was 50 basis points – one-half of 1%:
By this reckoning, Uncle Sam is a worse bet than Germany now.
The rise in the price of US CDS coincides with the drama in Washington over raising the Aug. 2 debt ceiling deadline.
According to the Bipartisan Policy Center, tax revenue for the 29 days of August after the 2nd will total roughly $172.4 billion. That compares to $306.7 billion in spending.
Ordinarily, the Treasury would cover that $134.3 billion gap by issuing new Treasury debt. But after Aug. 2, it won’t be able to do so. That means Uncle Sam would have to immediately balance his books.
What would that look like?
Well, he’d have to choose his priorities. The Bipartisan Policy Center report breaks down the government’s Aug. 3-31 expenses in a way that shows what the $172.4 billion in revenue can cover… and what it can’t.
The Social Security checks would still be cut… but not income tax refunds. Medicare and Medicaid would be kept going… but not food stamps. Military contractors would still be paid… but not the troops.
They can move certain items above the $172.4 billion line and others below it… but something has to give.
And as we pointed out yesterday, matters are even worse than that list of priorities reveals.
About $507.4 billion in existing Treasury securities come due between Aug. 3-31. To “roll over” that debt, the Treasury must issue new securities.
If the unthinkable happens, and the government isn’t able to “roll over” the debt?
$100 billion of that debt matures on Aug. 4. Another $100 billion matures a week later, on Aug. 11. That eats up the entire $172.4 billion in revenue expected for the month right there… before the government spends a penny on anything.
Unless the Treasury Department is sitting on some slush fund we don’t know about, it’s game over. The United States defaults… triggering those credit default swaps.
“Let’s imagine,” said a Newsweek piece by Daniel Gross last spring, “a world in which the US government, lacking the will to tax or cut spending, can’t scrape up the cash to stay current on interest payments and can’t roll over debt as it matures.
“That would trigger a huge decline in the value of Treasuries and mortgage-backed securities. The balance sheet of every US financial institution – JPMorgan, Goldman, Citi, your neighborhood bank, the Federal Reserve, money-market funds – would be decimated. There wouldn’t be a single solvent bank, insurer, or company in the United States.
“The large multinational banks, which have significant US operations and plenty of this stuff on their books, would likewise be wiped out. Oh, and foreign holders of US debt… would be toast, too.
“In this dystopia, who, precisely, would be able to make good on the insurance sold on US government debt? The last time we had a set of events that were supposed to trigger large-scale payment of credit-default swaps, the system basically shut down. All the investors who bought insurance on financial instruments from AIG got paid off in full only because the US government bailed the company out.
“Who would bail out the Treasury Department and the Federal Reserve?”
Addison Wigginfor The Daily Reckoning
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
The US bubble looks like it’s about 40 times bigger than the Italian bubble. Someone should re-draw it to the proper scale.
Social Security is a profitable government business. It funds other parts of the government, stuff like tax cuts for the wealthy.
The debt rollover has no effect on the debt ceiling. If we owe $14T dollars now and we pay off $500B, that would make the debt $13.5T. Then we can issue another $500B without touching the debt ceiling.
Hey Scott, the SS was a profitable business. They are now paying out more than they take in. Now the wealthy won’t get their tax cuts, I guess they will have to pay ALL the taxes, like they already do.
I don’t think anyone would let default goes free. Confidence, credibility go down the drain amid 1000 years of contructive effort – all effort blown away by a single vocab ‘default’. A solution would be sought, at least an interim mesaure will be deployed instead of the straight forward default. Needless to say, the bulk of ‘responsibility’ would be shouldered by the printers.
Does ‘other spending’ include funding the IMF so it can pull Europe’s chestnuts out of the fire?
Your comment neglects pointing out that the SS Trust fund accrued “reserves” of $2.6 trillion. In most years SS collected more than it paid out and 2010 was the first time it paid out more than it collected. These “reserves” were intended to cover for such a situation. These “reserves” were “invested” in non-marketable U.S Treasury issued debt “securities.” Well, so much for securities; with no hard assets to sell to and raise unencumbered cash the Treasury must now issue more debt “securities” to cover its original obligations plus cover the short fall. Trustees Report
http://www.socialsecurity.gov/OACT/TR/2011/ ; See revenue table here
http://www.socialsecurity.gov/OACT/ProgData/fyOps.html and investment table here:
A CBO projects the shortfall will continue through to 2021 estimating a $630 billion shortfall. It the “reserve” funds had not been borrowed and spent by the Fed on other programs outside S.S. and if the Trust actually had the cash on hand it could draw from that $2.6 trillion reserve. $2.6 trillion is $2600 billion. If the CBO projections prove accurate for a shortfall of $630 billion by 2021 if we deduct the $630 billion from the current reserves that leaves a balance of about $1970 billion, or $1.9 trillion.
This is an exacerbated problem of Congressional long-term fiscal mismanagement that will burden tax payers with double taxation: when we paid our Social Security taxes initially and eventually a second time when it comes time to pay off with interest the new loans the Fed generates to pay of its old debts to the Trust Fund.
The US bubble is 30.25 times the size of Italy. They used the diameter of the Italy circle x 5.5, not the area. The US circle should have about 2.2 x the diameter of Italy to be the proper scale by area.
Thank God we’re not a banana republic where we can allow the military troop and their family to starve and not get a military revolt. I wonder how long the troop can be starved before they turn their weapon on the government and the people?
It seems to me Addison’s priority is misguided. I myself would starve everyone else before the one’s holding the weapon.
Scottie – you’re aware that Social Security taxes were reduced this year?
Say what? – you didn’t know that?
Now the program is so profitable it funds everybody’s tax cut, as well as that little non-cost-of-living-increase-check that all retirees got in the mail as a bonus from President Zero!
I see they’ve fixed the chart. Now throw in Japan and it will really blow your mind.
Like I said. Social Security has been a very successful program. It funds all those tax cuts for the rich, and has ever since Ronald Reagon was drooling in the Oval Office.
“Never mind professional politicians are the reason we have a debt problem in the first place.” Yep its those psycho professional robot politicians fault. And who were the idiots that put them in power? We are the idiots along with those that pray to the great god money on wall street. We are all to blame. But then that wouldn’t allow us the great feeling of being victims of things out of our control. Hogwash. It is time to stand up and say no more.
You share very good information Another good post Addison.
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