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Lydia Fisher

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Tick-Tock Goes the Developed World's Debt and Derivatives Clock: U.S. National Debt Fast Approaches 15 Trillion!

Posted: 10/25/11 01:35 PM ET

Over the weekend, I walked past a playground. I stopped to look through the black iron fence -- children smiling, carefree, running from swing to monkey bars. All against the backdrop of a beautiful sunny day, azure sky. I was struck by a flash forward moment that got me thinking about the future. What does it hold for them?

My thoughts wandered to graphic images of worldwide riots and discord, streaming through media venues everywhere. What do our children think when they see fireballs, fighting, tear gas, arms, and police in riot gear now within the developed world? Sci-fi or real? How do they take it all in?

No doubt, this must have been a difficult weekend for President Sarkozy and Chancellor Merkel, among others. On the table: how to recapitalize Eurozone banks laden with sovereign debt, the rescue bailout fund and extent of the "haircut" on Greek bonds.

French megabanks own Greek debt, Italian and Spanish debt too. The French government can't really afford to bail out its French megabanks, if and when a Greek default occurs. It would put its AAA rating at risk. The AAA rating is crucial for France's role in the EU.

Chancellor Merkel, on the other hand, faces a dilemma. Can you blame the German people for not wanting to bail out the French banks -- where does it end if the Eurozone debt crisis cascades?

A leveraged bailout rescue fund is being cobbled together -- one that would partially back Eurozone state bond issuance. It reminds me of Brady bonds. Brady bonds were issued by Latin American countries and backed by U.S. Treasuries, to remove third world debt sitting on the balance sheets of U.S. commercial banks back in the 1980s. The difference then was the full, faith and credit of the US government had heft to make the Brady bond market work. In the case of the Eurozone, hard to figure what "backing" truly means?

Or, will the European Central Bank (ECB) step in to print money to save the Euro and determine which countries, in effect, are to be bailed out. Some note that the ECB life support action would go beyond its purview.

Meanwhile the "haircuts" on Greek debt keep getting bigger. I'm hearing 60%. Greece is in chaos as austerity is forced on to its people. Greek general strikes have shut down vital services -- garbage is strewn on street corners. If this cascades, do we really know what happens to the world financial system? The crisis is spreading to Eastern European banks and Asia. We're dealing with the unprecedented.

Not only do U.S. banks have direct exposure to the Eurozone, it's the indirect exposure by U.S. banks via derivatives that's difficult to quantify. How grave? Depends upon who's doing the talking.

Having been at Bear Stearns when the 2008 crisis first hit, I'm struck with déjà vu. There was talk that Bear's best days were ahead, just a few months before the March 2008 weekend takeover. Bear Stearns triggered the cascade, showed up the widespread fraud and corruption permeating the financial system. Have things changed? How confident can we feel?

Can we wager how a European cascade would unfold? How fast will it travel to derivatives laden "Too Big Too Fails?" Where does that then put the taxpayers as "Too Big To Fails" imply a government guarantee as they are too big to fail. Actually, the notional value of derivatives has grown rather significantly since the 2008 crisis.

Calls into question integration and conglomeration, doesn't it? Imagine putting 17 families under one roof -- disparate fiscal policies, cultures, way of approaching life. Was U.S. bank integration into megabank supermarkets meant to be -- such concentration of risk in a handful of banks?

G.K. Chesterton has a view about solving problems. "It isn't that they can't see the solution. It is that they can't see the problem." In other words, in order to solve a problem we need to understand what something is meant to be.

Do politicians see the problem, but just don't want to take the solution. Seems to me that hardly a politician, be it in the Eurozone or the U.S., wants to do the needed heavy lifting, let alone have things fall apart under his/her watch. Yet, can we afford to continue the short-termism ad infinitum that has afflicted business, banking, and politics?

The developed world is awash in debt. And, maybe short-term ways to grow economies, like financial speculative bubbles and credit based consumption no longer work. Compare it to squeezing a lemon. Just maybe we are at the inflection point. With housing, finance and credit creation in a funk, where will the growth come to support debt, to support jobs? And then how do we as a society deal with the job-eliminating trends of technological automation (something I have written about extensively).

Meanwhile the U.S. national debt clock ticks towards 15 trillion. We've added nearly half a trillion in just a few short months since the national debt ceiling debate. For every dollar we spend, we now borrow $.50. U.S. States face 4 trillion in debts.

News from the Super Committee charged with coming up with 1.5 trillion in savings before Thanksgiving doesn't look promising. We're not even talking about a 1.5 trillion reduction in debt, but a reduction in spending. Already talk of another US downgrade has surfaced.

For all the talk about European performance, getting their act together (Greek overspending and corruption included) what about us?

I understand spending to help those in need, but spending for Solyndra?

Recall the 2009 1 trillion stimulus; then QE1, QE2; then what looks like terminal short interest rates near zero (at least to 2013); then the 400 billion Operation Twist; then a near half trillion jobs bill on the table that coincides with the 2009 stimulus run-off; now potential talk about QE3?

If QE1 and QE 2 did not reignite the economy, why would QE3? Injecting reserves into the banking system, so far, has led to that money finding it's way not entirely towards lending, but into investments, some into speculative assets. Which, incidentally, contributed to food spikes worldwide, igniting protests.

As financial and corporate titans built pyramids, they relegated masses to the bottom of the pyramid. Oddly, in Maslow's "Hierarchy of Needs" pyramid, those at the bottom find themselves in survival mode. Survival is a top priority for most Americans faced with debt, unemployment, wage compression amidst rising food and energy prices.

The last thing on the minds of many Americans is spending when they're struggling to survive, to put food on the table and pay essential purpose bills. The solution to our economic malaise is a structural reformation of the economy -- takes time and long-term thinking. We have the tools to do so -- starting with public campaign finance reform for federal elections to break the lock on the system, tax reforms, bringing back the rules that worked all along, like Glass-Steagall, just to name a few.

Will "QE-ing" the economy help? Too much debt relative to revenue intake for individuals and governments in the developed world is the conundrum. How long can developed nations throw more debt after more debt, without reigniting growth and creating jobs? We've Greece as an example of what happens when Debt to GDP exceeds way beyond 100%.

Maybe Americans are ahead of the curve -- they're deleveraging. If the goal is to reduce mortgage rates with QE3, so that any additional money can go into spending, Americans are choosing to deleverage.

Something to the old adage: with experience comes wisdom.