Debt Default Has Already Arrived!!

Deal or no deal, the greatest fears resulting from a federal government debt default are here.

For all practical purposes, default has already occurred. Short-term interest rates on borrowing have increased 11-fold since October 1st!!

CNN displays a ridiculous default countdown clock ominously ticking downward to zero on October 17th.

It’s ridiculous because the U.S. federal government won’t default its debts on October 17th. If Congress fails to act that won’t happen until November sometime.

Repo Market

Repo is short for “repurchase agreement”. That is where a financial institution agrees to sell U.S. Treasury bonds it holds and then repurchase them at an agreed set price at a later time.

U.S. Treasury securities are the most abundant liquid assets in the world. They back most of the world’s business transactions.

Once the bonds are sold, the money is usually loaned to a bank or business to allow it to conduct a business transaction; like making a home loan, for example. Once the transaction is completed the transaction loan is repaid.

These are very, VERY short-term loans, usually overnight. They last just long enough to complete a business transaction. They are backed by short-term U.S. bonds.

The bank or business pays the cost of the repo agreement plus a profit to the financial institution who sold the T-bill to make the transaction possible. Then, after repayment, the institution that sold the T-bills repurchase them at the previously agreed price.

That is how business gets done.

Repo Rates Rise

Since 10/1/2013 10-year bond rates unchanged while 1-month rates skyrocket (Data: US Treasury)

Repo Market 1-Month Rates from July 1st to Present

Most folks have never heard of the repo market but it is the financial instrument that drives the U.S. economy.  Because the U.S. dollar is the currency of world trade, it also drives the global economy as well.

The cost of most of the world’s business transactions hinge on the cost of U.S. Treasury bonds. Their yields rise, and the cost of a business transaction rises.

Overnight business transactions are a big, BIG deal. There are about $5 trillion (Yup, that is trillion with a capital “T”) dollars worth of overnight U.S. bond-backed business transactions every day!!

Those transactions are usually made possibly by selling short-term 1-month U.S. Treasury bonds because they have the lowest yields of all the bonds. Longer term bonds have higher yields making them more costly.

Not anymore! Since October 1st 1-month bond yields have risen to 11 times their rate on September 30th!

Today, business transactions financed by selling 1-month U.S. Treasury bonds cost 11 times more than they did 15 days ago.

Couple that with the $5 trillion in daily business transactions and those pennies add up to a lot of mullah!

It makes everything cost more. The technical term financial experts use to describe rising repo market rates is, “Wholly crap!!”

The Wall Street Journal reports today that investors are dumping U.S. Treasury bonds like hot potatoes!


CNN’s October 17th default date is an illusion. It makes for terse headlines, nothing more.

October 17th is the date Treasury Secretary Jack Lew estimates that the federal government will have only $30 billion left in the bank. He targets that date because he reasons that federal government expenditures can exceed $60 billion in any one day, so the risk of default is elevated.

Lew doesn’t say the federal government will default on October 17th. It won’t.

At the current pre-shutdown rate of about $3 billion/day spent that the federal government doesn’t have, it means there is at least another 10 days before the government goes flat broke.

But since the government continues to take in revenues and the government is in partial shutdown we will last into November before debt default actually happens. There are no big balloon payments that come due November 1st. The Daily History of the Debt Results show that on November 1st the U.S. debt has actually went down 5 of the last 8 years.

None of that matters. The most feared effect of a federal government default has already hit the Repo market. The repo market drives the world’s economy.

That puts the federal government already in de facto default.

Things only get worse from here.


About azleader

Learning to see life more clearly... one image at a time!

Posted on Oct 15, 2013, in Budget, Business, Debt, Debt crisis, economics, Economy, Government, news, Politics, Shutdown. Bookmark the permalink. 1 Comment.

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