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

http://www.zerohedge.com/article/cost-insure-us-%E2%80%9Cponzi-scheme%E2%80%9D-against-default-rises-sharply

Bloomberg TV's Matt Miller talks to David Stockman

http://youtu.be/3qKg1fq1FC8

"That kind of crisis would be a vicious sell-off in the global bond market. That could come sooner than people think, because the Fed is getting out of the market with QE2 ending.”

"For the last six months, the Fed has bought nearly 100% of this $6 billion a day that's been issued. Once they are out of the market, where is the new bid, where is the new demand going to come from? The Chinese are getting out of the market because finally they are having to deal with the rip-roaring inflation they have had. The people's printing press of China will not be buying as much U.S. debt because of its own internal problems.”

"When we get to real investors, what are some of the real investors saying today? PIMCO is short the bond, they're selling, they're not buying.

"When we get into a two-way market when real investors began to look at real risk, begin to look at the gong show in Washington and the magnitude of the gap that we are borrowing, I think we're going to get a re-rating of sovereign risk. We're going to get a huge dislocation in the global bond market, and then maybe the wake-up call will finally come."

"The real problem is the de facto policy of both parties is default. When the Republicans say no tax increases, they're saying we want the U.S. government to default. Because there isn't enough political will in this country to solve the problem even halfway on spending cuts. When the Democrats say you can't touch Social Security, when you have Obama sponsoring a war budget for defense that is even bigger than Bush, then I say the policy of the White House is default as well...That is the question that really needs to be understood better and appraised by the bond market. Both parties are advocating default even as they point the finger at each other."

Gold: inflation and deflation.

The Euro crashes due to intensified fears of a Greek default, and rising Spanish bond yields.  The USDollar rises as a result.  Which means gold should plummet, right?  Wrong, gold surged in a flight to safety today.

Many investors correctly buy gold as an inflation hedge.  What they don't realize is that gold performs even better in a deflationary environment, as debt default risk rises.  When the credibility of sovereign debt and paper currencies erode, precious metals remain a safe haven.

FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds To Drive Down Yields

The enclosed video is a long, but good explanation of how the Fed is committing fraud, causing the US government to default on its debt.  The Fed is selling put options against its own debt in order to suppress long-expiry US Treasury bond yields.  Keeping interest rates low is necessary to keep the government's borrowing costs low, and to stimulate the economy, as low rates encourage borrowing and consumption.  Manipulating markets is not only fraudulent, it is also perilous to global financial market stability.  The Fed is taking the wrong side of the bet, hoping interest rates won't rise in the future.  If I was 99% certain the US government will default on its obligations, I am 99.9% certain now after watching the video.

Tragically, this manipulation of interest rates will backfire, causing yields at the long end of the curve to eventually soar.  The Fed can control short-term interest rates (they are currently pinning them down to nearly zero), but cannot control longer-dated bond yields, which move in tandem with market expectations on inflation.  In other words, as inflation rises, so do bond yields, and inversely, bond prices drop.  Rising bond yields (interest rates) will result in the US government defaulting on its debt, which will cause the global financial system to collapse.

Banks became insolvent after making outsized bets that turned sour.  They took on too much leverage, and needed a bailout in 2008 in order to avert bankruptcy.  AIG similarly was over-leveraged and under-capitalized based on the amount of default insurance they wrote (in the form of credit default swaps).  Many hedge funds were liquidated due to insufficient hedging.

Hedging infers risk mitigation against a bet that goes the wrong way.  Many hedge funds, the too-big-to-fail banks, and AIG were insufficiently hedged.  In fact, they INCREASED their risk profile, instead of decreasing their exposure.  Instead of hedging, they levered up to obscene levels, which increased their returns when they bet right, but caused massive losses when they bet wrong.  Not only were the players in the casino losing, but the casinos themselves on Wall Street were losing big, betting on a perpetually rising housing market.

The bank bailouts merely transferred the toxic balance sheets of the failed banks into the Fed's balance sheet, which meant the Fed was now over-leveraged.  Just like home prices can't appreciate forever, interest rates can't drop forever.  And when interest rates do rise, the debt the Fed carries will implode, much like mortgage-backed securities did in 2008.  But this time, there will nobody left standing to bail out the Fed.

http://www.youtube.com/watch?v=ZnZnkaq8Nf8&feature=player_embedded

State default risk

Click on chart to enlarge.

http://www.bespokeinvest.com/thinkbig/2010/8/30/state-default-risk.html

Even allies are ganging up on the US

It's understandable that China has criticized US monetary policy and erected trade barriers in the form of import tariffs. Even Japan is lashing back at Washington DC for calling out Toyota executive in the brake scandal.

And now Swiss banks are declaring US government debt at high risk of default. Perhaps this is retaliation for the US attacking Swiss private banking laws.

Here's the problem I see developing: our foreign traders have historically funded our overconsumption, buying US Treasury bonds. Without their participation in future bond auctions, there will be no buyers to replace them. Other than the Fed, which means the US Treasury just has to print more money, and down the drain the dollar goes. It's already occurring, as 30-year Treasury bond yields ticked up last week. That does not bode well for an already fragile economic recovery.

And yet folks still view the USDollar and Treasury bonds as safe havens.

Notice where US sovereign debt ranks relative to the rest of the world. It may surprise you--but then again, it may not.

http://ftalphaville.ft.com/blog/2010/02/10/146606/handy-sovereign-risk-table/

Deficit to GDP

Risk of sovereign debt default is permeating throughout nervous bond markets for Greece, Spain, and Portugal--among other countries, as credit spreads widen.

The US fiscal picture isn't much better. Yet, investors still view the USDollar as a safe haven. Time will tell whether US Treasury bond investors will be trapped in another bubble.