Topic: Cost to Insure U.S. “Ponzi Scheme” Against Default Rises Sharply

[Libertas]

H/T ZeroHedge

http://www.zerohedge.com/article/cost-insure-us-%E2%80%9Cponzi-scheme%E2%80%9D-against-default-rises-sharply?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

60% rise in 1 year US CDS's!

"According to this measure, the U.S. is now more likely to default than Slovenia and Indonesia in the next year."

"In the more liquid 5 year U.S. CDS, the cost to insure has risen by some 50% in the last week. The U.S. is considered more likely to default in 5 years time than South Africa, Malaysia, Panama, Brazil and Colombia."

"While a US default would not be “catastrophic” it would likely lead to a very sharp fall in the U.S. dollar, (especially versus the hard currency, collateral and monetary asset that is gold), sharp fall in U.S. bonds and sharply higher interest rates.  This has the potential to create another systemic crisis involving sovereign nations and banks globally and could lead to a deep recession, a Depression and in a worst case scenario - hyperinflation."

Caveat Emptor!

[Weisshaupt]

Hmmm, I wonder if this has anything to do with it..

$6.5 trillion in present value needed to make SS trust fund “solvent” over 75 years.  This is the unfunded obligation in present value terms over the next 75 years.

  $3.0 trillion in present value needed to make HI Trust Fund “solvent” over 75 years.  This is the unfunded obligation in present value terms over the next 75 years

From now on, Social Security will be running a permanent cash-flow deficit, which means that taxes collected for the program aren’t enough to cover the benefits paid to retirees. Starting now, the program will draw from the trust fund balances to keep payments to retirees going; in concrete terms, Treasury will borrow money to pay back the trust funds

Yeah, thats 10 Trillion to fund those programs if we had it today. - thats 5X current tax revenue. But don't worry, if you are creative SS will see you through because there is no problem  its just a meltdown, but all it takes is some changes around the fringes.

oh, and don't buy a house or you are an idiot.

[charlesoakwood]

In contemplation of keeping its value there are only so many secure places for one to put money .  If one believes the nation will survive this mess intact, *housing or land is one of the more certain places to put that money. If we have an inflationary situation similar to the Carter years the value will increase, if it is worse, people who were homeowners will become tenants. (It will be a lessor's market.)

*all possible due diligence must be applied to purchase

[Weisshaupt]

In contemplation of keeping its value there are only so many secure places for one to put money .  If one believes the nation will survive this mess intact, *housing or land is one of the more certain places to put that money. If we have an inflationary situation similar to the Carter years the value will increase, if it is worse, people who were homeowners will become tenants. (It will be a lessor's market.)

As  Glenn Reynolds of instapundit is fond of saying, Carter-esque Inflation is a best case scenario at this point. But you need some of the foreclosed inventory to clear before prices will bottom and the government is printing money to try and make sure that doesn't happen, and the demographics are also against you-- baby boomers, many whom own two houses, will be either trying to downsize or finance their retirement (SS checks being able to buy a loaf of bread)  by selling one or both of their homes - or renting it -providing more competition for tenants. Unless Immigration makes up for the drop in population , you will simply have too much inventory.  If it doesn't get worse than Carter then yes, there might be some gain in value as a inflation adjusting  revenue stream as a rental - but that assumes a lot of things and paints a pretty rosy picture.

Real unemployment is already worse than it was during Carter, and inflation is still low compared to those years. Fuel Prices as going to be higher,  and there is a good likelyhood they will try price fixing as things get worse - meaning shortages, quotas, and a black market in fuel - and more jobs lost, more foreclosures, and more inventory.  And don't rule out rent control - gotta help those poor people who can't afford a house of their own you know. With  Interest rates at 30%  no one will be buying and you may not be able to keep the place up for what you get in rent - that is why so many buildings get abandoned in rent controlled cities. Squatting might become a  popular passtime, so much so that police can't keep people evicted from bank owned and other vacant  property, and if that happens they  will probably be too overworked to evict your tenant if they decide they no longer want to (or can't) pay... especially when they see others living rent free  with no consequences.  Detroit may become the norm, and not the outlier. You can buy whole city blocks in Detroit for very little right now, but past a certain point the property just isn't going to come back, and cant be restored without a good deal more investment in ever increasing materials prices, and   unless the jobs come back, you still can't get rent,  and that can't happen till the money supply is stable, and the debt burden under control. If law and order breaks down (and that could simply be from overworking police), property rights become whatever you can personally protect and secure.

[charlesoakwood]

I have faith in America, we won't go catastrophic.

[Weisshaupt]

I have faith in America, we won't go catastrophic.

Okay, I'll bite.  Define Catastrophic.  If you mean Mad Max, beyond thunderdome living then sure, we won't be catastrophic.
But Libertas' original post from Zero hedge shows a lot of people are betting on a default of some magnitude.

"In the more liquid 5 year U.S. CDS, the cost to insure has risen by some 50% in the last week. The U.S. is considered more likely to default in 5 years time than South Africa, Malaysia, Panama, Brazil and Colombia." "While a US default would not be “catastrophic” it would likely lead to a very sharp fall in the U.S. dollar, (especially versus the hard currency, collateral and monetary asset that is gold), sharp fall in U.S. bonds and sharply higher interest rates.  This has the potential to create another systemic crisis involving sovereign nations and banks globally and could lead to a deep recession, a Depression and in a worst case scenario - hyperinflation."

When the default occurs we can no longer borrow in real terms. That means we either live within our means ( meaning Medicare/SS aregreatly reduced or eliminated) and try to pay off our existing  14 Trillion debt at really high interest rates, or we print massive amounts of money to pay the interest on the debt we have already incurred, and default by inflation - which might very well turn hyperinflationary.  High inflation Carter Style is the best case scenario here. Or do you see another way out of this I don't? Austerity produces the riots like we have already seen in Italy and Greece.  Hyperinflation produces Weimar.  Granted the American people's responses in those situations might be different, but if Wisconisn Teachers Unions and the Student riots at California schools over tuition hikes are any indication, then most likeyl we are looking at an identical reaction.  Hyperinflation on the oter hand just happens, and everyone makes do the best they can.

If you see a different scenario that doesn't include underpants gnome logic, I would love to hear it. I am depressed as hell and any glimer of hope I will hold fast.


 

[rickl]

I have faith in America, we won't go catastrophic.

Frank Zappa - It Can´t Happen Here 1966

Sorry; couldn't help it.

[charlesoakwood]

Good one Rickl. We are in the era of farce, a musical comedy,  and we should always have appropriate musical accompaniment.
~~~~~~~~~~~~

Catastrophic as in Weimar or Brazil with the middle class buying anything durable (pianos in non musical households), anything that would be of value after the money consumed itself. Or as in a repetition of our last conflagration. I think most of the Democrat leadership are aware of history and will not push this past the point of no return.

Ultimately I have faith. I see good and noble men and women, Paul Ryan and Sarah Palin for example, trying to achieve a positive outcome and I believe there are many waiting in the wings.  The Tea Party scored 40 wins this past election and leadership pealed off 20, sad.  But that also indicates we have gained a solid 20.  I also think there are rational folks on the other side of the isle talking in private and waiting for an appropriate time.  That will be the positive political solution.

The worst part of this situation is perception.  We are not there yet.
And plotting on the parts that make up the debt is a distraction.  
If one has a debt he pays it. If one owes Master Card $50K one pays it, it makes no difference what names are in the itemization, the whole debt is owed.  If one doesn't have the money he gets a second job, works longer hours, takes on more clientele.  Our problem is the idiot prince who will not allow us to go to work.  He burns our food, stifles our resources, and spends our reserves. He and his merry band of regulators and lawyers are the problem.

The only thing necessary to turn this crap sandwich around is the elimination of regulation turning loose the engines of industry. We will have a solid dollar, security, and ample revenue. If they do push this past the point of no return events will be unimaginable and financial planning for most of us will be moot.  I have faith in America, it's people, and God who fortified and guided us in our genesis. We are going to be OK.

[Libertas]

I honestly hope things improve, but all the indicators portend ill or at best show widespread weakness.  Take jobless claims, inflation, real estate and debt, at these levels it is really adding impetus toward stagflation, and not a temporary form, it may be with us for a while.  While we repeat and compound the worst of the Carter years, it is pretty difficult to have happy happy thoughts.

More not so happy happy news -

Another big drop in Treasuries.

http://www.zerohedge.com/article/second-biggest-weekly-drop-ever-treasurys-held-feds-custodial-account-foreigners-dump?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

I have to say, the first comment on this ZeroHedge post by Long-John-Silver sums up proper investment strategy for me!

"Beans, Bullets, and Bullion Bitchez!"

[Weisshaupt]

I think most of the Democrat leadership are aware of history and will not push this past the point of no return.

The Democratic leadership is trying to destroy America. They are aware that historically America has supported freedom, the rule of law, and inalienable rights and they hate those things and want America out of the picture. These are NOT the Democrats of the Kennedy era- they are true, died in the wool America Haters who admire Mao, Pol Pot and Stalin as great men and want to impose socialism/communism/fascism upon us.  They WANT a collapse so they can sieze power and build on the ashes.  Doubt me?  Talk to them. See what we are up against.  They have entirely different, and nefarious goals.

If one has a debt he pays it. If one owes Master Card $50K one pays it, it makes no difference what names are in the itemization, the whole debt is owed.  If one doesn't have the money he gets a second job, works longer hours, takes on more clientele.  Our problem is the idiot prince who will not allow us to go to work.  He burns our food, stifles our resources, and spends our reserves. He and his merry band of regulators and lawyers are the problem.

If we got rid of SS/Meidacre we might be able to pull this one out. But an honest man would pay his debt right? So SS and Medicare have to pay full benefits? The Idiot prince and other Democrats know exactly what they are doing. 1/2 of the population is on the dole and dependant.  But say I am wrong, and they are just misguided and they come around, and Palin and Pals repeal Obamacare and lift the burdensome regulation. It is morning in America - but we still have a hangover and a massive bill from last nights all out spending bender.  Bleary Eyed we look at the bill - 14 Trillion borrowed, and we need another 10 Trillion RIGHT NOW to cover our drunken promises to care for everyone in the bar in their old age  - 60-80 Trillon  in Medicare and SS. We owe  40% of the Worlds current  GDP  and that doesn't count the other things we need to do over the next few years like buying food and living, paying interest, and  funding  the military. And once the economy recovers the inflation hits and big time - we have piles of money that are going to flood the market and cause inflation.  In theory the Fed can sop up that liquidity by raising intrest rates, but they can't becaus we own 14 Trillon, and just going to 3% would mean over 300 billion in interest payments.  Damned if you do. Damned if you don't.
God will take care of us as individuals . Not so sure if He is still keen on the country.





[/quote]

[Weisshaupt]

Here is a Ray of Hope..

Political Calculations predicts our chances of default to be under 5%

Of course CDS are the instruments that should have indicated the risk of the bad mortgages that caused the 2008 crisis, so perhaps they are not the best gauge of default probability. It would be more accurate to describe this as our market  perceived chances of default. 

[Alphabet Soup]

Doubt you?! I agree with everything you said!

[IronDioPriest]

I think most of the Democrat leadership are aware of history and will not push this past the point of no return.

The Democratic leadership is trying to destroy America. They are aware that historically America has supported freedom, the rule of law, and inalienable rights and they hate those things and want America out of the picture. These are NOT the Democrats of the Kennedy era- they are true, died in the wool America Haters who admire Mao, Pol Pot and Stalin as great men and want to impose socialism/communism/fascism upon us.  They WANT a collapse so they can sieze power and build on the ashes.  Doubt me?  Talk to them. See what we are up against.  They have entirely different, and nefarious goals.

If one has a debt he pays it. If one owes Master Card $50K one pays it, it makes no difference what names are in the itemization, the whole debt is owed.  If one doesn't have the money he gets a second job, works longer hours, takes on more clientele.  Our problem is the idiot prince who will not allow us to go to work.  He burns our food, stifles our resources, and spends our reserves. He and his merry band of regulators and lawyers are the problem.

If we got rid of SS/Meidacre we might be able to pull this one out. But an honest man would pay his debt right? So SS and Medicare have to pay full benefits? The Idiot prince and other Democrats know exactly what they are doing. 1/2 of the population is on the dole and dependant.  But say I am wrong, and they are just misguided and they come around, and Palin and Pals repeal Obamacare and lift the burdensome regulation. It is morning in America - but we still have a hangover and a massive bill from last nights all out spending bender.  Bleary Eyed we look at the bill - 14 Trillion borrowed, and we need another 10 Trillion RIGHT NOW to cover our drunken promises to care for everyone in the bar in their old age  - 60-80 Trillon  in Medicare and SS. We owe  40% of the Worlds current  GDP  and that doesn't count the other things we need to do over the next few years like buying food and living, paying interest, and  funding  the military. And once the economy recovers the inflation hits and big time - we have piles of money that are going to flood the market and cause inflation.  In theory the Fed can sop up that liquidity by raising intrest rates, but they can't becaus we own 14 Trillon, and just going to 3% would mean over 300 billion in interest payments.  Damned if you do. Damned if you don't.
God will take care of us as individuals . Not so sure if He is still keen on the country.

'Tis it, in a nutshell. The outlook is grim. And like you, I think it's quite possible that God's grace has limits that we've obliterated. Once, we were perhaps deserving of it as much as any nation could be, but now, seeing what we've become, I have my doubts. But He knows better than we do, and His ways and purposes are not ours. He may yet have reason to shed His grace upon America.

Hopelessness is not the answer to the monumental challenges we face. It's not who we are as a people. We can simultaneously accept certain realities, prepare for what may come, work against the worst-case scenario, and bolster one another with hope and confidence in our ability to affect positive change. None of those are competing actions.

[Weisshaupt]

I also ran some numbers in Excel, using the CBO's 6% growth rate in Entitlement costs, cutting the deficit to zero and using a constant federal budget frozen at  2.6 Trillion a year, a federal debt interest rate of 3%, NO INFLATION (to keep my calcs simple - assume all number are real adjusted 2011 dollars) ,  and assuming a 3% average growth rate in the economy , of which the government get 18% ( Hausers Law)  we STILL can't get out of this mess - we would still be at a point where national debt is 100% of GDP in 2030 - after that the entitlement wave declines and we will be through the worst of it and it may get better. So that is the Treading Water best case.  

If we assume absurd growth, say 10% year over year increases in GDP - the debt doesn't start reducing until 2024- at a grand total of around 16 Trillion.  Bottom line we can't grow ourselves to prosperity. Devaluation or default  have to become a permanent and inevitable  part of the mix, or a cut in SS/Medicare benefits which is the same thing as not paying our debts. The degree to which these things happen is based on too many variables to count, but they WILL HAPPEN . You can't simply raise taxes because Houser's law sets the actual revenue. TAx revenue is almost completely independant of tax rate.. however GDP growth rate is affected by tax rate, and you need the GDP to grow- but this just proves it can't grow fast enough to deal with our problems.

And in a world where  "American"  people are forming flash robs, and stealing railroad lines, trash cans  and telephone wire, I do not think we can count on the average American to put up with austerity measures that bring the national budget in line with revenue, much less politically support the gutting of SS and Medicaid by reducing benefits (for the young)  while gradfathering the excessive benefits the old have planned on.

And Mid, I didn't model in all of the State and Local debts.. which may very well be bailed out by the Fed. One way or another those will have to be paid or defaulted on or a combination of the two.  Again, there just is NOT A WAY to grow ourselves out of this.