Economic crisis could see the U.S. default on Government bonds says macro experts

A deepening monetary and economic crisis in the United States will likely lead to a sovereign default, according to analysis by leading macro hedge fund manager, Crescat Capital.

Amongst a series bearish economic data points – including negative consumer sentiment, rising mortgage rates, unemployment, negative real wages growth, plunging savings, and falling corporate earnings – Crescat pointed to a breakout in the US 30-year Treasury yield as one of the most concerning right now.

“Tightening monetary conditions and the steep rise in the cost of capital will not only negatively impact consumers, corporate earnings, and overvalued financial assets, but it will also cause pain for highly indebted sovereigns,” said the firm in a letter to investors.

“The chart of the US 30-year yield has broken out from a 41-year macro downtrend. This is truly concerning from a leverage standpoint as the US economy remains in a deep deficit in both its current and fiscal accounts.”

Economic crisis
Image: Crescat Capital

“In the same way the Bank of Japan had to intervene in its bond market, we believe US policy makers will inevitably be forced to impose yield curve control to avoid a sovereign default.

“The likelihood of success of such policy is highly questionable and risks a monetary crisis given today’s high structurally driven global inflation levels.”

Related Asia Markets article: Prepare for a recession – grim warning from leading investment strategists

What would default mean for the United States?

The United States has successfully navigated through every economic crisis in history without defaulting on Government debt.

Default would occur if Congress blocked measures to raise the debt ceiling as interest rates on U.S. Treasury bills surge and the Government decided to not make interest or maturity payments.

This would lead to chaos in the economy.

Bond yields would rise even further as they would no longer be seen as ‘safe’ assets, making it harder for the Government and U.S. companies to raise capital.

There would be major ramification for the stock market, as there would be more perceived risk surrounding U.S. corporations.

And perhaps the biggest impact would be on every day Americans. If the Government isn’t repaying its bondholders, it would be unlikely to fully fund its operations.

Government programs and welfare could be cut. Wages for Government workers, including the military, would likely come under pressure.