Panic Spreading over U.S. Debt and Corporate Default Levels

The increase of central bank interest rates is creating an “imbalance” in the financial system that can unleash a global meltdown if not stopped. The problem is, that it can be stopped only if the speculative side of the system is shut down. Traditional measures, such as lowering rates again, would not work. It is like the driver who steps on the brakes to stop a car traveling at 200 kph only to discover that the speed is increasing.

Last week, we explained that the increased cost of sovereign debt financing due to higher interest rates is pushing indebtedness out of control, and the world bond market over the brink. The week before, we had shown how banks holding huge amounts of older bonds are accumulating losses on the market value of those bonds which they can no longer conceal, in addition to the losses due to the slowdown of the economy.

Succinctly put, the ratio of new cumulative debt produced by the higher cost of money, to the shrinking physical economy as described in Lyndon LaRouche’s famous “collapse function” (Triple Curve), has reached a boundary condition.

This week, both the IMF and the U.S. Congress’ Budget Office launched the alarm. At the Oct. 9-15 IMF/World Bank meeting in Marrakech, Morocco, IMF Economic Counsellor and Director of the Research Department Pierre-Olivier Gourinchas said not only that the U.S. debt situation is precarious, but that corporate defaults are up dramatically from 2022 to 2023. According to S&P Global data which quantify what he said, corporate defaults in 2023 through August, and in the month of August alone, were higher than in any year since the “Great Recession” of 2009. And for credit cards and auto loans, defaults on the sub-prime categories are now at 4-5%.

On Oct. 11, the IMF’s Fiscal Affairs Director Vitor Gaspar was quoted saying that “Under unchanged policies, debt dynamics in the U.S. are very unfavorable”. (The remedy pushed by the IMF is worse than the illness: Banks are supposed to increase leveraged credits for Green projects in developing countries. In other words, more debt for unproductive investments).

The Committee for a Responsible Federal Budget predicts, based on the assumption that rates remain one percentage point higher than the CBO’s (Congressional Budget Office) forecasts, that interest spending in the current fiscal year is on track to exceed $800 billion, more than double 2021’s $352 billion figure. And in 2026, the government’s net interest expense would reach 3.3% of GDP, the highest on record.

With an eye to what this means for the financial system in the coming weeks, Michael Barr, the Vice Chair for Supervision at the Federal Reserve, warned Oct. 9 that economic losses in a major financial crisis could amount to the U.S. GDP.