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There are three broad aspects to the US debt crisis. First, in the current fiscal year (2008) we are spending insane amounts of money on “defence” projects that bear no relation to the national security of the US. We are also keeping the income tax burdens on the richest segment of the population at strikingly low levels.

Second, we continue to believe that we can compensate for the accelerating erosion of our base and our loss of jobs to foreign countries through massive military expenditures — “military Keynesianism” (which I discuss in detail in my book Nemesis: The Last Days of the American Republic). By that, I mean the mistaken belief that public policies focused on frequent wars, huge expenditures on weapons and munitions, and large standing armies can indefinitely sustain a wealthy capitalist economy. The opposite is actually true.

Third, in our devotion to militarism (despite our limited resources), we are failing to invest in our social infrastructure and other requirements for the long-term health of the US. These are what economists call opportunity costs, things not done because we spent our money on something else. Our public education system has deteriorated alarmingly. We have failed to provide health care to all our citizens and neglected our responsibilities as the world’s number one polluter. Most important, we have lost our competitiveness as a manufacturer for civilian needs, an infinitely more efficient use of scarce resources than arms manufacturing.

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"Speculative Onslaught. Crisis of the World Financial System: The Financial Predators had a Ball
Financial Tsunami, Part V"

by F. William Engdahl

"....
The Tsumani is only beginning:

The nature of the fatally flawed risk models used by Wall Street, by Moody’s, by the securities Monoline insurers and by the economists of the US Government and Federal Reserve was such that they all assumed recessions were no longer possible, as risk could be indefinitely diffused and spread across the globe.

All the securitized assets, the trillions of dollars worth, were priced on such flawed assumption. All the trillions of dollars of Credit Default Swaps—the illusion that loan default could be cheaply insured against with derivatives—all these were set to explode in a cascading series of domino-like crises as the crisis in the US housing market unraveled. The more home prices fell, the more mortgages facing sharply higher interest rate resets, the more unemployment spread across America from Ohio to Michigan to California to Pennsylvania to Colorado and Arizona. That process set off a vicious self-feeding spiral of asset price deflation.

The sub-prime sector was merely the first manifestation of what was to unravel. The process will take years to wind down. The damaged products of Asset Backed Securities were used in turn as collateral for yet further bank loans, for leveraged buyouts by private equity firms, by corporations, even by municipalities. The pyramid of debt built on assets securitized began to go into reverse leverage as reality dawned in global markets that no one knew the worth of the securitized paper they held.

In what would be a laughable admission were the consequences of their criminal negligence not so tragic for millions of Americans, Standard & Poors, the second largest rating agency in the world stated in October 2007 that they "underestimated the extent of fraud in the US mortgage industry." Alan Greenspan feebly tried to exonerate himself by claiming that lending to sub-prime borrowers was not wrong, only the later securitization of the loans. The very system they worked over decades to create was premised on fraud and non-transparency.

Credit Default Swap crisis next:

As of this writing, the next ratchet down in the US financial Tsunami was the monocline insurers where, short of a US government nationalization, no solution was feasible as the unknown risks were so staggering. That problem was discussed in the previous Part IV.

Next to explode will be the imminent probability of meltdown in the $45 trillion market in Over-the-Counter Credit Default Swaps (CDS), the brainchild of J.P. Morgan.

As Greenspan made certain, the CDS market remained unregulated and opaque, so that no one knew what the scale of the risks in a falling economy were. Because it is unregulated it often was the case that one party to a CDS resold to another financial institution without informing the original counterparty. That means it is not obvious that were an investor to try to cash in his CDS he could track down its payer of the claim. The CDS market was overwhelmingly concentrated in New York banks who held swaps at the end of 2007 worth nominally $14 trillion. The most exposed were J.P. Morgan Chase with $7.8 trillion and Citigroup and Bank of America with $3 trillion each.

The problem had been exacerbated by the fact that of the $45 trillions of credit default swaps, some 16% or $7.2 trillion worth were written to protect holders of Collateralized Debt Obligations where the mortgage collateral problems were concentrated. The CDS market was a ticking time bomb with an atomic detonator. As the credit crisis spreads in coming months, corporations will be forced to default on their bonds and writers of CDS insurance will face exploding claims and non-transparent rules. A claims settlement procedure for a market nominally worth $45 trillion did not exist as of February 2008...."

Read the whole article, and others, Here at Global Research
The single most challenging analysis site I've seen in Canada:

["About Global Research

The Centre for Research on Globalisation (CRG) is an independent research and media group of writers, scholars, journalists and activists. The CRG is based in Montreal. It is a registered non profit organization in the province of Quebec, Canada.

The CRG is also involved in book publishing and the organization of public conferences and lectures.

Iran has discussed this matter and has a strong backer with China. There's also the EU and their currency.

The real reason that Iran is the next target of the US

ETA: Googling Iran and bourse would probably be a useful exercise in regard to understanding this issue.

[ 05 March 2008: Message edited by: N.Beltov ]

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Originally posted by Lard Tunderin' Jeezus:
A fascinating article....

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This paragraph from the article is a chilling foretaste of where Canada's New LiberaTory Coalition Government™ is intending to take us:

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Our excessive military expenditures did not occur over just a few short years or simply because of the Bush administration's policies. They have been going on for a very long time in accordance with a superficially plausible ideology, and have now become so entrenched in our democratic political system that they are starting to wreak havoc. This is military Keynesianism — the determination to maintain a permanent war economy and to treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.

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[ 05 March 2008: Message edited by: M. Spector ]

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Originally posted by N.Beltov:
I trust all this analysis includes the matter of the currency that other countries choose to buy and sell oil with. I seem to recall one author who claimed that Iraq's decision to switch to a currency other than the U.S. dollar was a major factor in the U.S. decision to attack, bomb, invade and occupy Iraq.

Iran has discussed this matter and has a strong backer with China. There's also the EU and their currency.

The real reason that Iran is the next target of the US

ETA: Googling Iran and bourse would probably be a useful exercise in regard to understanding this issue.

[ 05 March 2008: Message edited by: N.Beltov ]

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“Again and again it has always been the world’s leading lending country that has been the premier country in terms of political influence, diplomatic influence and cultural influence. It’s no accident that we took over the role from the British at the same time that we took over the job of being the world’s leading lending country. Today we are no longer the world’s leading lending country. In fact we are now the world’s biggest debtor country, and we are continuing to wield influence on the basis of military prowess alone”

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The US became a net debtor country in 1986, and over the past few years, it's been borrowing something like $700b/yr, almost all of it from China and the oil producing states. Add to that another $400b/yr of federal borrowing, and you get a story where the US is borrowing 8% of its income in order to finance its spending.

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So even if the US cut military spending back to zero, it would only cut total borrowing by about half. The problem is even more fundamental.[/QB]

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No kidding !

With a national debt of 9.4 Trillion
http://www.brillig.com/debt_clock/

If the government is paying 3% interest, that's $270 billion a year, just for debt service.

With the US government lowering interest rates in some desperate attempt to goose the economy (or the stock market ?), it becomes less attractive to park your savings in dollar-denominated accounts in US banks.

Also, that same lowering of interest rates makes the US $ less attractive = currency devaluation.

but then important imports - like oil - become more expensive.

I looked at all this in 2003 & 2004 and thought, this is not sustainable.

It's not exactly a silver lining, but I would have to say the whole situation is absolutely fascinating. Adding to the complexity of the US economy is the practice of securitizing mortgages, for example where a bank bundles 1000 or 10,000 mortgages & re-sells them. Some of the related terms - mortgage backed securities (MBS), hedge funds, derivatives, etc. One of the finance technical writers I have found most helpful in explaining the whole big mess is John Mauldin.
http://www.investorsinsight.com/

He's a money manager that sidelines as a writer.

"Why the U.S. has really gone broke" has something to do with ...
1. we don't make anything anymore
2. the credit crisis associated with MBS'.
3. although the US is very dependent on borrowing to keep the Blimp afloat, in some areas of the world the US is down-right un-neighborly. If you had a neighbor who was always getting deeper in debt, and went around beating up some of the other neighbors, would you loan them money ?

[ 05 March 2008: Message edited by: SwimmingLee ]