As Predicted. USA is a "gnats eyelash" away from Defaulting
a nation with $37 trillion in funded liabilities and $200 trillion in unfunded obligations can’t outrun math.
USA circling the drain feature by Carmine Lombardi
The United States has crossed a Rubicon of fiscal credibility. Moody’s historic downgrade of America’s credit rating from Aaa to Aa1 isn’t merely a technical adjustment-it’s a flashing red siren about a debt crisis metastasizing beneath the surface of global markets.
With Treasury Secretary Scott Bessent openly discussing extending maturities and slashing coupons on foreign-held debt, Washington isn’t just flirting with default-it’s engineering a slow-motion financial coup against the world economy.
The Default Playbook in Plain Sight
The Treasury’s proposal to unilaterally alter bond terms for foreign creditors isn’t creative accounting-it’s financial expropriation.
When Jeff Gundlach, Bob Moriarty and Jon Little call this a veiled default , they’re underscoring what markets already know: a nation with $37 trillion in funded liabilities and $200 trillion in unfunded obligations can’t outrun math. Forcing foreign bondholders into longer-dated, lower-yielding paper would shatter the bedrock premise of U.S. debt-that it’s the world’s safest asset. The immediate aftermath? A 30-year Treasury yield spiking to 4.96% [FOX], capital flight from dollar-denominated assets, and a scramble for tangible stores of value like gold and silver .
Leverage Meets Systemic Fragility
Moody’s warns that U.S. debt will balloon to 134% of GDP by 2035, but this misses the real danger: derivatives markets. In 2008, the notional value of over-the-counter derivatives stood at $592 trillion. Today, that figure exceeds $1.2 quadrillion [BIS data]. U.S. Treasuries underpin this edifice as collateral. A loss of confidence in their liquidity or credit quality could trigger margin calls exceeding the 2008 crisis by orders of magnitude. The Federal Reserve’s balance sheet, already bloated at $9 trillion, would face impossible pressure to backstop both Treasury markets and cascading derivatives failures.
Political Failure as Accelerant
The downgrade reflects a bipartisan truth: Washington’s fiscal recklessness has no ideological boundaries. Despite President Trump’s pledge to balance the budget, deficits are widening through tariff-driven revenue schemes and Musk’s DOGE department layoffs. Moody’s explicitly doubts any administration’s ability to curb mandatory spending , and with good reason-April’s 105,441 job cuts (the highest non-pandemic April in five years) reveal an economy already buckling under austerity’s weight.
The Coming Currency Crisis
When the world’s reserve currency issuer toys with default, the fallout transcends bond markets. The dollar has already shed 20% against major currencies this year , and Bessent’s trial balloon ensures further erosion. Historical parallels? Look to 1971’s Nixon Shock-but with magnitudes greater consequences. A dollar collapse would ignite inflation in import-dependent sectors, crush emerging markets holding dollar reserves, and force a BRICS-led push for alternative reserve currencies.
This isn’t 2008 redux. It’s 1929 meets 1971 in a derivatives-laden, algorithmically-driven financial system. The Moody’s downgrade isn’t the story-it’s the first tremor before the quake. When the “safest asset” becomes a vector of default, no hedge fund, pension system, or central bank can claim immunity. The only question now is what breaks first: the Treasury market’s liquidity, the dollar’s hegemony, or the political will to stop this train.