Fiat Money Cycle -> Financial Tsunami = [B][B]

http://www.thetrader.se/wp-content/uploads/2011/07/fiatmoney.gif

1. The above figure graphically illustrates the structure of the Invariance of Default Principle (see previous blogs) and specifically gives us a bit more details of the government bailout to government bailout third phase of the Great Cycles of Default. Recall in our shorthand notation this is represented as [B][B].

2. The figure above suggests that the [B][B] logic is to simply cover each default with a larger and more credible government authority which can either take over the non-performing assets of the bankrupt entity or simply shut it down and make the taxpayer whoever they happen to be pay for the shortfall. In both cases, the governments in question acts the absorber of residual risk.

3. However, when the entity to be bailed out happens to be the government of the reserve currency, there is no more kicking the can down the road. The global residual risk carrier is the US itself. It faces an August 2nd debt ceiling deadline. This will probably be extended to avoid the mother of all defaults for a while. But the essential strucural problem will not go away, and even with the passage of a law that allows a higher debt ceiling, that ceiling will be quickly approached and breached. The US back in May 2011 was estimated to be paying around $90 billion per month on the servicing of its public debts.