Fiscal Cat 5 Hurricane Warning (Karl Denninger)

  Oct. 22, 2008 (The Market Ticker) -- There is a very real risk that this Treasury Issue could force GDP return on new debt below zero.  If that happens then the stability of the monetary system disappears immediately and you will see instantaneous and very large fails in the Treasury marketplace.

  The consequence of this event would be catastrophic.  Ben would have only two choices -- print raw money, which would immediately collapse the Treasury marketplace, or get Treasury and Congress to immediately reduce issue and spending to sustainable levels.

  What would "sustainable levels" be?  Given that issue is running $3 trillion year-on-year, this could result in an immediate and forced cut in all federal spending by 50 percent or more as the TARP and other program money will have been spent and cannot be recalled.

  Yes, you read that right.  Now go look at the Federal Budget and you will find that you could eliminate all discretionary programs and all of the military and not get there.  This means that in order to attain stability we would have to immediately gut Medicare and Social Security by about 50 percent, cut our military budget dramatically, perhaps by 25 percent or more, and eliminate essentially all discretionary spending -- all farm subsidies, the Department of Education, Unemployment Assistance and more.

  Oh, and having done that, the long end of the curve would probably still spike to 10 percent, which means 13-14 percent mortgage rates.  Cut the value of every house in America in half -- again -- from here.

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