What Happens When the US Banks Take a Hit On Their Senior-most Assets? Pt 1

The situation in the US Congress marks a new low for politics in this country. I’m not going to bother going into details related to the various plans that have been proposed because all of them fail to be relevant.

What I mean by this is that all of the various cuts ($1 trillion or so over however many years) are in fact irrelevant given the fact that the US is running deficits north of $1.5 trillion PER year already.

As for the debt ceiling, whether we raise it or not is also irrelevant in the grand scheme of things. The US is broke and has been for a long time now. There is absolutely no way we will ever pay back our debts which now stand at $44K per man woman and child in the US.

This of course fails to include social security, Medicare and other unfunded liabilities which put the US debt levels closer to $60 trillion.

What I’m trying to say with all of this is that the US welfare state, or the notion of politicians dishing out handouts in exchange for votes, is soon coming to an end. Social security, Medicare and many other government spending programs will be cut in the coming years. Regardless of your feelings regarding these programs, they are not funded and with tax receipts falling (and will fall further as the Depression deepens) the US will simply not have the money to pay for these programs.

We will also see the US defaulting on its debts with some kind of debt restructuring included. This is absolutely guaranteed to happen. And THAT is the item of most import for the US financial system.

The reason for this is that the entire financial system is based on the ratings of specific securities with US Treasuries as the highest rated AAA. So if US debt takes a downgrade this will result in systemic volatility on a mass scale.

For one thing pension funds, investment funds, and other entities that are required to only invest in AAA-rated securities will have to move out of Treasuries when this happens.

On top of this, US banks will undergo another Crisis based on the fact that Treasuries are the senior most assets on their balance sheets. What happens when the bedrock of their balance sheets drops dramatically in value forcing system wide margin calls?

KA-BOOM!

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Good Investing!

Graham Summers

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