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

Tyler Durden's picture

From Gold Core

U.S. at Risk of Default as Cost to Insure U.S. “Ponzi Scheme” Against Default Rises Sharply

Gold and silver are lower today with profit taking, Chinese bond buying and increased risk appetite being cited for the price falls. Gold is marginally lower in all currencies and is 0.2% lower in U.S. dollar terms despite the dollar coming under selling pressure again this morning. Risky assets have recovered somewhat from recent losses with Asian and European equities and commodities receiving a bid.

Cross Currency Rates

Reports of China buying Eurozone government debt may have led to a rise in the euro and equities. However, the scale of sovereign debt risk internationally is such that even significant and ongoing Chinese buying would be unlikely to contain the crisis.

Sovereign debt risks in Europe and internationally continue to threaten the increasingly fragile economic recovery.

While most of the focus has been on Greece and Eurozone sovereign debt issues, the not insignificant risk posed by a U.S. sovereign debt crisis increases by the day. The risk of a US default continues to rise which can be seen in the sharply increased cost to insure U.S. sovereign debt.

Risk of a U.S. default can be seen in the credit default swap (CDS) market.  1 year U.S. CDS has risen from 23 to 37 or by 60% in the last six trading days (see chart below). According to this measure, the U.S. is now more likely to default than Slovenia and Indonesia in the next year.

US CDS 1 Year – 3 Month Duration – US (brown), Japan (Yellow), UK (Purple)

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.

Credit default swaps on U.S. debt saw a flutter of activity in the past week with investors placing 135 trades in U.S. CDS in the week ended May 20, far above previous weeks, when in some cases only one contract trade was seen.
This compares to 360 CDS trades in the week on Spain's sovereign debt, 191 on Greece, 142 on Portugal and 136 on Italy.
Volumes in U.S. CDS have been ticking up, though at about $4 billion they remain significantly lower than the $9 trillion in outstanding U.S. Treasuries.

The squabbling between Democrats and Republicans last week as the U.S. debt ceiling of $14.3 trillion was being reached did not help sentiment towards U.S. debt.

Gold Bullion in US Dollars – 30 Days (Tick)

Nor did former Soros’ partner Stanley Druckenmiller, the billionaire former-hedge fund manager and legendary investor, comment in the Wall Street Journal that the Federal Reserve’s bond purchases are a fraud and a “Ponzi scheme”.
He advocated a U.S. default or a technical default, saying “"technical default would be horrible, but I don't think it's going to be the end of the world. It's not going to be catastrophic."

Credit default swaps are far from a perfect way to establish credit worthiness and risk of default of countries. However, it is arguable that quantitative easing and governments internationally, including the US, electronically creating money in order to buy huge tranches of newly created government debt has significantly distorted the government debt markets. Thus, record low yields are artificial and are not a good way of measuring fiscal and monetary risk.

The market manipulation that is QE1, QE2 (and possibly QE3, QE4 etc.) has completely distorted the free market in U.S. government debt and indeed all capital markets. It has led to artificially low interest rates in the US and internationally.

It has been successful in the short term in keeping yields low but short term panaceas have a habit of becoming long term illnesses.

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.

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Alex Kintner's picture

Even Bill Moyers is calling it a Ponzi scheme now.

From a Q&A session this week...

My interview with Andrew Bacevich — soldier, scholar, prophet — opened so many eyes to the futility of empire and to America’s financial system as a Ponzi scheme...

scratch_and_sniff's picture

Just think though, when the US defaults, it will mean they have just gorged on the output of Asian peasant labour for the last 20 years, and now you’re going to fart in they're face. I don’t think they're going to like it.

kridkrid's picture

War. But not so much over our default, but who gets to establish "what's next", in my opinion.

Thisson's picture

What's next is obvious.  Default/Jubilee, followed by a US return to the gold standard (it's the only money people will trust, and US is a gold "superpower"), followed by another cycle of closing the gold window and printing like crazy. 

Alex Kintner's picture

I'm thinking the damage won't be limited to a rude dawg fart. I'm imagining vast armies of homeless roaming the continent with all the associated crime and violence. Starving people do desparate things.

johny2's picture

It looks like that, but also it looks like China will manage to bring down US in a similar way that US did USSR, by undermining its economy to the point it collapses, as the dollar surelly is.

Burnsy's picture

Druckenmiller is right. This will not lead to widespread selling of US bonds. It will not lead to a collapse in the dollar(that is an event for another day, post QE^N). Rather it will, if it happens at all, lead to selling of risk assets and a strengthening dollar in the short term, as it will be perceived as a step toward rectifying the US fiscal mess.

Herne the Hunter's picture

It's a good thing that AIG is going private, just in time to get bailed out again from CDS exposure

hugovanderbubble's picture

Its because Debt careful

Poor Grogman's picture

It might be a ponzi scheme

but its OUR  ponzi scheme

You, you ,you speculators should lay off or we will hike your margin requirements.

Robslob's picture

Having CDS on government debt is like expecting AIG to payout without government assistance.

There she blows....

Alex Kintner's picture

That was my first thought: Who will be left standing to payoff CDSs on a country's debt? Wasn't CDS part of the problem that nearly nuked world economies in 2008? And now they are insuring entire countries. Sounds like insurance for fools.

augie's picture

I see nothing foolish about investing in CDS. There are few alternative investments which would be prudent given the certainty of the impending apocalypse.

Alex Kintner's picture

All I'm saying is "When a TBTF bank has to payoff all the debts for a country that collapses, who is going to bailout the TBTF bank? "

Sean7k's picture

Will it really matter at that point? Augie is just saying, if you're going to bet- take the bet that requires the whole tent to collapse.

ATM's picture

That's exactly when it matters. When the real shit hits the fan then that's the ime to have already acquired real, lasting wealth and not some now worthless piece of paper from a failed bank, company, country or whatever.

I think that's the point. If it all is nothing but a Ponzi then the real trade is to get actual physical wealth assets.

Samsonov's picture

I'll go a step further: Not only would a US default not be catastrophic, there will be a time soon where it will not even be noticed.  US ownership of its own debt will continue to increase until a default would affect only a very few.  Eventually, the US will hold all of it and no one will notice the inevitable Congressional vote that simply abolishes it all.

Of course, the casualty will be the dollar, but as long as its decline is gradual, there will be no economic upset.  You'll know the process is advanced when they stop minting pennies.  You'll know the default is near when they eliminate nickels and dimes as well.

Alex Kintner's picture

Well there is also the mutual funds (tied into the 401K pensions) that are soaked in Tbills. And most of the Money Market funds are propped up with Tbills. As I recall a major concern for Henry Paulsen in 2008 was that all the Money Market funds were being withdrawn and tettering on collapse.

HoofHearted's picture

I'm expecting that soon all of our 401ks will be required to hold some portion of assets in Tbills "for our own safety." It is only after this confiscation that we'll see a US default.

blindfaith's picture

for the ten billionth time, you can not default if you have a printing press...period.  Everything else, I agree with 100%.

That alone is why you have a Congress indifferent to the catastrophe hanging over the heads of Americans.  Why you have "important" consulting names suddenly shrugging their shoulders at such a despicable idea as 'not being able to pay your bills' ...make good on your promise, keep your honor intact.  So what is a few week late on a payment, big deal, or not paying at all (my have we been taught a new lesson and quickly adopted it as the new bible).


The idea of a hypothetical "default" is like everything else in a society that no longer has honor, it is meaningless.  No one cares, like so many drug induced stupors of total indifference.  Deception, lies, thefts, coveting, cheating, are all part of the admission into the new Washington and Wall street clubs and fraternities.

Both the Democrat and Republican parties want ( got that ) want a technical default.  The Democrats don't want cuts, the Republicans don't want what is the real statement they are making?  Technical default...but wait, there is more...the date keeps creeping into the future, it is now August. 

And, the value of the dollar, shit they don't care about that either.  Not when you have the undisputed right to raise your salary and benefits and have a nice cushie job waiting at some company you have been nice to for years.


Stuck on Zero's picture

I believe that history has shown that when a government resorts to the printing press it collapses shortly thereafter. 

Urban Redneck's picture

What is the exposure in the CDS market to a technical default in the US? 

While in the abstract I think that the discussion of default consequences gets a bit hyperbolic- I think the quantitative approach merits periodic review and re-analysis. 

Fiat2Zero's picture

Well that is clearly the goal of the strong dollar policy. To slowly kill the dollar.

The problem is we don't control all the variables.

There are the other developed nations who want to kill their currency slowly, but slightly faster to confer an advantage. The race to the bottom might start out orderly, but I doubt it will end orderly.

You can't always get whatcha want....You can't always get whatcha want...

hugovanderbubble's picture

Just look the munibonds CDS In 2 and 5 years...tranches.

youngman's picture

Default means they will not pay...I do not see that..Geitner said it yesterday..."the USA will never not pay its bills"..that is a true statement...they will just pay you back in deflated dollars....they will print to will get your $100 back...but it will only be worth $20 by then...that is their all works until the rest of the world starts using something else to pay for things....and that my friends is exactly what they are planning right now...the rest of the world is trying to get out of the dollar knowing its going to be printed into infinity...I see see it..they see it..

gmrpeabody's picture


Give the man a cigar!

AUD's picture

Gold and silver are lower today with 'profit' taking as CDS on US debt rises?

Bullshit. A better explanation is speculators still gunning for central bank 'easing'. Like winning the lottery, more than enough to risk some gold.

Fiat2Zero's picture

Silver drop was the typical engineered, coordinated selling to generate the "waterfall decline.". The margin pre-announce did nothing to the market, so another tactic had to be tried to stop silver's relentless march to $40.

It's become so predictable at this point.


Summer is going to be a complete volatile mess...

oogs66's picture

Have you noticed our debt remains exactly $25 million below the ceiling every single day?  What a joke.  They have so many games they can play that it is easy to keep it at exactly $14,293,975,000,000.  

Sean7k's picture

There are very few things we can do other than produce a good or service that people will want regardless of the machinations of the Elites. Before default, every method of wealth confiscation will be tried. 

As 401k's are still available, as SS and Medicare are still being paid, we aren't there yet. People will use the dollar until people refuse to take it- and then they will wonder why they didn't make other plans.

It is the nature of people to go along. Just as investors continue to buy overbought stocks to generate a gain. Facing the prospect of real change is too terrifying for almost all. 

People want to assume there will be violence in the streets and roving gangs of thugs. Baloney. People do not become wolves when they have lived the life of a sheep. Just as in the Great Depression, long lines of the disenfranchised will create hoovervilles (much like in 2008), they will beg for charity and food, they will haunt the places they can survive for free. Then they will die.

Others will realze that government has failed them and will return the favor. The government will experience a "rebirth" with new promises of freedom for all, a new currency and new faces. 

The big money will already be gone to new locales. America will start down the same road all empires eventually walk- the diminished military, the slow dispersal of it's power to new empires, the attempt to hang on to the new coattails. She will be stripped of what wealth is left as the carpetbaggers feed off the carcass. 

It will take time and we all have plenty of that. I for one, will not go gently into that night, but my worries will be for my children and grandchildren who will never have experienced life without the fears we carry today. 

If only people would have had the courage to realize that this type of governing system is is a failure-forever. Calling anarchy a utopia, they seem to believe what we have now is one. That you can fix what is irretrieveably broken and shattered. Holding their dead child to their chest- they still believe they can breathe new life into a rotting corpse. 

It is a special type of insanity, I think. One we all share.

Weisbrot's picture


this being a Ponzi Nation will eventually lead to a decriminalization of illegals (duh) and eventually their citizenship... gotta get the extra productivity ($$$) from some place, right......



DosZap's picture

 decriminalization of illegals

Hell, California is releasing 33,000 Felons, because they are over crowded and this is inhumane.

Imagine another 33k felons, on the streets of America.

And Obumma has a secret plan"THEY" are working on to remove our rights to own firearms.

Can it get anymore insane?.

tmosley's picture

On a related note, someone bought ALL of the COMEX deliverable bars off of APMEX last night.  They normally move one every few days.  They had 8 last night.

Makes me think that those will be used to satisfy longs at the COMEX.  Shit, if they are desperate enough to drain retail, then things must really be falling apart.

DosZap's picture


 Had to be, Comex bars are the worst investment in silver anyone can make.


tmosley's picture

Exactly.  Like carrying around a billion dollar bearer bond and trying to get change for it.

Dolemite's picture

Sell EuroUSD and stocks
Buy long end of US treasurys

Monedas's picture

We've been commiting slow Socialist suicide for 75 years ! The Chicoms had hard core porn Communism for 50+ years ! They are starting to back away and go Capitalist ! We continue with our Socialist "suicide is painless" policy ! They are filling the void we are gifting them ! Barney Frank should be able to get his lips around this ??? Monedas 2011

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