Monetary policy has been "the great enabler" that central banks used to keep interest rates at "absurdly low levels for years now" and this has encouraged politicians to believe that sovereign debt is "a lot cheaper than it really is," David Stockman, former director of the Office of Management and Budget, told CNBC Tuesday.
"Politicians have not been willing to take the tough steps to impose the pain, the austerity and the tough trade offs that are required to control this," Stockman said.
But things are changing as the Chinese aren't buying as much sovereign debt because they have to take care of "their own inflation spiral," and the Federal Reserve will have to end its second round of money printing soon, he added.
"The current situation is like the sub-prime mortgages crisis of a few years ago," Stockman said.
Monetary stimulus, or quantitative easing, is officially due to end at the end of the month and talk of more stimulus has been rife, though to date Ben Bernanke, Federal Reserve chairman has kept silent on the issue, despite the debt ceiling deadline of August 2 nearing for Congress to agree on raising it further.
“The day of reckoning is rolling in, it may not be today or this week or this month but we’re very much towards the end of what can be sustained," Stockman warned.
"In other words the balance sheets of the big countries have been used up. We’ve used ours, we don’t have any balance sheet room left. The ability of the central banks to monetize this debt which they have is coming to an end," he added.
“The Fed and China have been the biggest purchasers of debt, that’s going to change. In the bond markets real investors began to realize that the politicians in the United States are just faking, that this Biden group meeting has no hope of coming up with a plan that will make a difference," Stockman said.
"Once it is clear that the Republicans will not agree to tax increases, the Democrats are dug in against any cuts in social security, it becomes evident to the market that the risk of owning and holding US government paper is far higher than it appears to be and far higher than the rigged rates we have today,” he added.