The cost to secure against a government default on the $31.4 trillion debt has spiked 10x in the past six months.

March in particular has seen a huge jump from 57 to currently 151 in one year US credit default swaps (CDS), up from just 15 in December.

The 5 year credit default swaps have not yet surpassed 2008, but are not far behind at 63 compared to the 86 peak in February 2009.

Rather than the debt ceiling, the spike in March suggests concerns over the credit worthiness of the United States arise due to concerns over the state of US commercial banking.

Three US banks collapsed in March, with another $200 billion bank, First Republic, joining in April while numerous other banks came under pressure this Thursday.

The US government is the ultimate backstop of these banks, with the Federal Deposits Insurance Corporation (FDIC) at risk of running out of funds if the Thursday market developments that saw crashes in some bank stocks proceed as they did in March and April.

Unlike in 2008 however, when the US government debt levels were at circa 40% of the GDP and far below 60%, they are currently far above 100%.

Its capacity to absorbs a proper banking shock, therefore, is not fully out of the question, and so where markets are concerned, things are as bad as 2008.

Aloof in Washington

When an economic crisis started developing in China sometime last year, we warned the officials there might be too hyped up on delusions at what might have been the peak of a bull, and so might fail to take necessary actions.

In US, it is difficult to think we have been in such euphoria too when much has stagnated outside of tech since 2008 and for Europe its GDP is still at or slightly lower than 2008.

We have not seen anything like the bull in China, and yet 2021 was a miraculous year both for markets and the economy, the likes of which we might never see again.

That one year hyper bull has been crashed by central banks without mercy, with Jerome Powell stating interest rates currently are 2% above neutral.

Whatever the ups and downs of the market, that Washington DC itself s in any sort of euphoria is unlikely. To the contrary, it may be at the bottom, but in a somewhat dual way where the economy is doing badly historically speaking on one hand, and where the economy has actually been doing fairly well in US in the past few years.

That may be because the fairly well part applies mainly, if not only, to tech and the middleman services like banking. So we have what maybe can be called a Schrödinger euphoria in Washington DC, it sort of is there but it kind of isn’t.

This is shown by the fact Biden spent $2 trillion to engineer the industrial part of the economy, and yet seems to take very much for granted investors, or the stock market, or some Republicans would say the market as a whole.

Republicans have put a stop to any further debt borrowing without debate. Biden will now meet them to not discuss that part, he says publicly, but obviously to discuss that part.

This is the height of politics in many ways, tax and spend. There are the clear base constituencies on both sides, to which they have to play, and then the independents who will ultimately judge.

A high stakes game where party propaganda and rhetorics are irrelevant as in this matter people will be very focused on the sustance.

Where markets are concerned however that is a sideshow in the immediate or short term. Politicians are discussing difficult matters, which is what they’re paid to do, so the market is watching movements, but not much else.

Because despite the heightened rhetoric on some parts, the market tends to be very good at focusing on the substance. In this case, even if there is a default, it would be a fake default. Not because the US can’t afford its debt, but because politicians are debating over tax and spend.

While the debt ceiling therefore seems to be consuming Washington DC, what the market is actually worried about seems to be ignored completely.

Whether state TV media or corporate general media, the absence of coverage over the handling of more than half a trillion dollars is one reason why something like Trump could happen. At the end of the day, just like banks, trust is much of what makes a media.

But just because you don’t hear a leaf falling it doesn’t mean it didn’t fall. Two year olds learn that as soon as they develop long term memory.

There is a banking crisis, and where investors are concerned it is systemic in as far as they are at risk of losing all of their investment if FDIC gets involved, and protecting against FDIC is impossible as a bank run can happen at anytime for any reason or even no reason.

Rather than getting a handle on all this and getting in front of it, Washington has come across as panickingly reacting, which has led to mistakes.

It is human nature of course to be in denial about something bad and just hope it goes away and all is as it was again, but where investors are concerned it is far worse than it was as they thought banks are safe, but it turns out their investment can go to zero and has gone to zero to the tune of $100 billion.

They like to say this about bitcoin, that it is a risky investment and you might lose everything. Even in Luna however, which collapsed due to its code fundamentally being unsound, investors ended up with at least some cents.

The US bank investors instead can actually lose everything as it is now proven, and that change won’t just go away through wishful thinking, nor are its consequences easily predictable.

That’s what the data is showing. Not only CDS-es, but also short term debt levels for the US government are higher than even for some corporations.

In some ways that makes sense because something like Apple doesn’t have to worry a mistake in fragile banking costs them trillions, and yet Apple can’t appoint or fire the chair of the Federal Reserve Banks which can print as much as it wants, nor can Apple tax Google as the government can.

The US debt therefore should be safer, but they did spend too much during the pandemic and prolonged the lockdowns unnecessarily, certainly in some states.

That has made the debt grow far faster than the economy, and at a 5% interest rate as the US government is being asked to pay for short term debt, that’s $1.5 trillion a year on just interest alone, never mind the actual capital.

$1.5 trillion is about as much as the US spends on both the army and social security combined. Just to keep this level of spending, it has to double taxation.

Add a banking crisis to it, and the risk they do too little to maintain confidence is not low.

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• Source: https://www.trustnodes.com/2023/05/05/credit-default-swaps-on-us-debt-spike-beyond-2008-levels