"Crisis of Confidence": Yes, Risks of U.S. Default Are Very Real, Charles Ortel Says

Earlier this week, Nobel-prize winning economist Joseph Stiglitz told Tech Ticker the U.S. "has absolutely no real problem servicing the debt at the current level"; meanwhile, Treasury Secretary Tim Geithner recently said America will "never" lose its vaunted triple-A credit rating after Moody's suggested it was a possibility if we don't get our fiscal house in order.

Take a hard look at America's balance sheet and "you have to be concerned," says Charles Ortel, managing director of Newport Value Partners.

Total gross U.S. debt is now $50 trillion or 12 times the nation's total gross income, according to Ortel, whose debt calculation excludes unfunded mandates such as Social Security and Medicaid but does include corporate debt which he says are "potentially eligible for bailouts."

Furthermore, Ortel says the Federal Reserve overestimates U.S. household net worth, because most of the "asset" side of the ledger is based on real estate valuations he says are overinflated.

"A strict, hard look at the national net worth statement will tell you that our assets are lower than you think and our debt is higher than you think," he says.

While the risk of an imminent U.S. default remains low, Ortel says the U.S. is facing a "crisis of confidence" among global investors and recommends credit default swaps on U.S. Treasuries.

Ortel made a similar recommendation to clients back in August 2008. The price of those instruments rose in value during the second half of 2008 and early 2009, then declined as the crisis abated. But sovereign CDS have risen again in value in the wake of debt crises in Dubai and Greece, and Citigroup notes U.S. swap spreads have widened at the second-fastest rate since Jan. 1, trailing only the euro zone.