Tuesday, November 03, 2009
Treasury Ponzi Doomed to Fail
U. S. Securities and Exchange Commission Ponzi Pyramid Diagram
In the early 1980s, a major recession and massive military spending resulted in huge government borrowing. The sale of U.S. Treasury bonds financed all that massive spending.
Many of the long term bonds issued at the time will begin to mature next year, and will continue to do so in large numbers over the next few years.
To pay its bills, the federal government floats its debt, meaning it issues new bonds to obtain the revenue to pay off old bonds as they reach their maturity dates.
Consider that: the federal government – so deeply, perennially, and perhaps terminally in debt – continues to issue Treasury bonds not just to maintain its deficit spending, but to pay back previous bond holders.
So, in essence, our government is literally perpetuating its own Ponzi scheme, whereby it is borrowing from Peter to pay Paul.
The U.S. Treasury Department now conducts more than 200 sales of debt by auction every year. All of it will eventually have to be paid back – with interest.
The US deficit for fiscal 2009 was $1.42 trillion, pushing the national debt to roughly $12 trillion. All that deficit spending has been financed with borrowed money.
According to the Office of Management and Budget, the National Debt is projected to skyrocket in excess of $14 trillion in the current fiscal year.
That will likely exceed GDP. And if it doesn't, any growth will simply be the result of additional government borrowing to finance further deficit spending.
That is not a solution. It is simply more of the same poison that's already slowly killing us.
But that's not the whole story.
The federal government assumed $6.8 trillion in new debt last year—a 12 percent increase—pushing its total debt to a record $63.8 trillion, according to USA Today. That amounts to $545,668 for each household.
The government does not have the capacity to ever repay that debt. Its obligations far exceed its means. And the hole is only getting deeper.
As a result of the recession, tax revenues in FY 2009 fell nearly 17 percent, the biggest decline since 1932. That will only result in even deeper borrowing.
For three decades, foreign governments have facilitated much of that borrowing.
The surplus cash deposits of exporters like Japan, Taiwan, South Korea, the oil exporters of the Middle East, and China – the world’s biggest exporter – have financed the U.S. public debt since 1980.
China alone holds an estimated $1 trillion in U.S. Treasury bonds and other government debt.
These nations liberally purchased U.S. Treasury bonds and left their money in U.S. banks, believing their money was in safe hands. But it now seems that doubts about that course of action are beginning to mount.
The Chinese and other big-time U.S. creditors have expressed concerns that Treasuries are becoming more risky. And they are starting to demand higher interest payments for further bond purchases.
Creditors have reasonable worries that inflation in the U.S. will gain momentum, lowering the value of the dollar and all dollar-based assets, including U.S. Treasuries.
The fear is that these investors might respond by reducing their purchases of U.S. Treasuries, or begin dumping their holdings altogether. That would also cause the dollar's value – already declining – to drop even further. The government would have to start paying higher interest rates to try to attract investors and bolster the dollar.
There are signs that this scenario is already starting to develop.
Driven by inflation fears, bond investors – especially international investors – have slowly begun selling Treasuries, pushing long-term interest rates up and the dollar down. The resulting danger is that bond investors will begin selling Treasury bonds faster than the Fed can buy them.
The Fed will surely continue its futile attempts to print its way out of trouble. Consequently, the huge international Treasury bond market, already trying to absorb a huge supply of new bond issues, could react accordingly and start a selloff. Realistic fears of hyperinflation could create a self-fulfilling prophecy.
The federal government, the biggest borrower in the world, has been the prime beneficiary of today's record low interest rates.
However, in Fiscal Year 2009 (FY09), the U. S. Government spent $383 Billion of your money on interest payments to the holders of the National Debt.
That made it the fourth biggest expense in the entire federal budget. We get nothing for it. It merely pays interest.
Yet, the debt continues to soar.
Interest payments to all bond holders over the past 30 years (the longest term of Treasury bonds) don't begin to payoff the bonds themselves. The government counts on bond holders rolling over their holdings and reinvesting. That is becoming increasingly less likely with each passing day.
Furthermore, bond interest is compounded, meaning that even if the government stopped its deficit spending, the total debt would continue to grow as a result of interest on the portion that already exists.
Despite this, our government's deficit spending continues unabated. Congress continually raises the debt ceiling to accommodate all of this additional debt burden.
Historically, the sale of government bonds makes less money available for private investment. That may not seem like much of an issue right now since much of the private sector is simply unwilling to go further into debt in these uncertain times. Businesses are determinedly paying off debts instead.
But any U.S. business, any entrepreneur, or any average citizen seeking credit will eventually be saddled by higher interest rates as a result of all this massive government borrowing and debt. That will spur higher prices across the economy.
When the government issues new debt, the supply of bonds increases, lowering the price and raising the interest rate. When there is deficit spending, the supply of bonds held by the public increases and interest rates increase as well.
The economy is always retarded by government debt. The larger the debt, the greater the damage.
For years, we've been warned that our government's irresponsible spending and mounting debt would come back to haunt us. It seems that time is finally arriving.
Old debts are coming due. In response, the government will continue to issue new debts to pay them off. We're on a carousel of debt.
The government is attempting to print and borrow its way out of crisis. Yet, it is only making its problems – our problems – interminably worse.
It is not hard to imagine that foreign bond holders will cease renewing. The Chinese have already warned us about this. How can anyone realistically expect us to payoff all our debt?
The jig is up. Get ready for price inflation, higher interest rates, and higher taxes. Get ready for further economic stagnation.
When the other shoe drops, it will feel like a boot in the face.