Actually, we are on a runaway train barreling straight toward default.

This jumped out at me this morning:

http://us.ft.com/ftgateway/superpage.ft?news_id=fto101320080512035866

European banks offer unlimited dollar funding
By Ralph Atkins in Frankfurt
Monday Oct 13 2008 04:05

European central banks have opened the floodgates with promises of unlimited dollar funding in a coordinated action with the US Federal Reserve.

The European Central Bank, Bank of England and Swiss National Bank said they were ready to inject as much as needed into the markets for dollars funding covering periods of seven days, a month and 84 days.

This is right out of Walter Bagehot's Victorian era rulebook for dealing with money panics and lending crises; 'lend and lend freely'.

Markets sometimes become seized with panic in which case all depositors to a bank or banks demand their deposits simultaneously, believing the bank will fail and only the first to arrive at the bank will be able to reclaim their money. A bank in this situation can either close or restrict redumptions and ultimately fail ... or, it can obtain funds from a central bank, a 'lender of last resort' turning over capital - assets such as loans made by the bank - temporarily as collateral to central bank and using funds it borrows upon that collateral to satisfy redemption demands, convincing depositors that there are adequate funds for all and that both the last and the first can have the same access to their money.

The idea is that conditions leading to the mass redemptions are transient and that when the panic subsides, the depositors will either cease demanding their money or will return funds that actually were withdrawn during the panic. Then, the subscribing bank will return the money borrowed from the central bank which will then return the collateral. While the central bank will lend vast (printed) sums to quell the panic, the sums will be returned in the end and the central bank will even earn some interest income. There will be no permanent damage to either banks' balance sheet.

The supposition is the that bank collateral is truly valuable, yet is undervalued by the depositors who would rather have cash. In other words, a crisis in confidence in the bank and markets ... and a liquidity problem. The Fed and other central bnnks have painted our current situation as a liquidity problem from its beginning, last summer. Since then, almost a trillion and a half dollars (in various currencies) have been loaned into the financial system by the lenders of last resort, accepting as collateral every sort of loan ... all this to little effect. Why?

Because this isn't a money panic, per se, the collateral that the banks are turning over to the central banks in exchange for liquidity isn't 'temporarily undervalued', it is actually worthless. Instead of the cycle where liquidity is exchanged for undervalued collateral for a short period, these assets are simply being dumped on the Treasury. The central bank cannot return them back to the subscribing banks, because the banks are going out of business, instead! The result is a dumping of garbage on the Treasury. The injection of liquidity is actually the massive exponential expansion of Fed's balance sheet, and US government debt, with an even greater expansion to come.

Now, our govenment risks exposure to the dollar- denominated currency and interest rate swaps 'markets', which value is $450 trillion ... if one percent of this is an 'unfunded liability' that finds its way onto the Fed's books. Can the Fed print $4.5 trillion with a straight face? Can it add that to the trillions in liabilities it has already accumulated?

There are all sorts of liability time bombs lurking within the 'collateral' being accepted by the lenders of last resort. This collateral is toxic for all the reasons listed in the article! Our real, sustainable production cannot support the structure of loans that has been built by hedge funds and banks upon it.

How this can avoid creating a money panic in US creditors is hard to imagine. Debt is rapidly becoming impossible for human tazpayers to repay. Who will be the lender of last resort to inject liquidity into the largest insolvent bank in history, the Federal Reserve System? Saudi Arabia? China? Are they stupid enough?

They have problems of their own and simply not enough cash! If these 'wealth centers' start printing and lending, they will rapidly become insolvent, themselves!

Another factor is energy awareness is factoring into economic considerations that did not exist a few years ago:

http://www.latimes.com/news/opinion/commentary/la-oe-keaton13-2008oct13,...

Preservation has always been a hard sell in Los Angeles. But maybe in the years ahead it won't be as hard as it used to be, considering several new facts. No. 1, as my Dad would have said, a building represents an enormous investment of energy -- much bigger than we thought when we were fighting to save the Ambassador. No. 2, we now know that construction of new structures alone consumes 40% of the raw materials that enter our economy every year. No. 3, according to the Advisory Council on Historic Preservation, the resources required to manufacture these materials and transport them to a site and assemble them into a structure is the equivalent of consuming 5 to 15 gallons of oil per square foot. No. 4, a Brookings Institution study indicates that the construction of new buildings alone will destroy one-third of our existing building stock by 2030. And finally, No. 5, the energy used to destroy older buildings in addition to the energy used to build new ones could power the entire state of California for 10 years, according to the National Trust for Historic Preservation.

Without a (rapid) change in strategy and a reflection that our situation is not a 'temporary' money panic, the US will default in less than a year.