On top of the $8.5 trillion dollars the U.S. Federal Government has obligated itself to spend in the foreseeable future, now the Fed has also committed to spending another $300 billion to buy long-term Treasuries over the next 12 months. That's $300 billion. That's just under one-third of a trillion dollars. And where will the Fed get this money?
The pundits would have you believe that taxation is the only option to raise this vast sum of capital, but the reality of the situation is that unless these pundits are utterly incapable of doing basic arithmetic – which they aren't -- they are simply trying to scare you. And perhaps rightly so, because there is only one way the U.S. government can fund $8.8 trillion in spending, and taxation is only a small part of the "solution."
To illustrate the mathematics of what I'm talking about consider this: there are about 304 million people in the United States, which means that the government would have to extract $29,000 in tax revenue from every man, woman, and child to come up with such a staggering sum of money. Even if the government didn't spend one dime beyond the $8.8 trillion, and taxed everyone at the same rate, it would still have to extract $29,000 from every human being in the U.S. in order to cover the debt it is creating.
As an aside, I had to perform these calculations in a spreadsheet, because my BA II Plus wouldn't allow me enter that many zeroes. And I still made a mistake, which a reader promptly pointed out. These numbers are hard to understand, much less work with, and that's what makes this so terrifying.
Over the years, I have collected a fairly impressive collection of skeptics, adversaries, and opponents who delight in criticizing my "radical" theories, and I'm sure that contingency will be out in droves to respond to this article. But before you naysayers get to firing on all eight cylinders – wearing the letters off your keyboards with furious strokes of merciless rebuttal -- I'm anxious for you to consider the cold, hard math I've just laid in your lap. Consider that a large portion of those citizens are retired, or children, or people otherwise incapable of or disallowed from working, and that $29,000 per person starts to get bigger very fast. How on earth can the U.S. government hope to squeeze that much money out of its citizenry?
Of course, the question is rhetorical, and since this is my article, I'll just go ahead and answer it. The U.S. government plans to "deal" with this unprecedented load of debt through the inflationary destruction of the U.S. dollar. It cannot tax enough to service the debt, so it will print the money.
But there's a part of the equation that leaves me scratching my head and chuckling a little, in a wry, disturbed fashion -- sort of like the way I chuckle when I see a dog chasing its own tail – and it's this: the United States government will print all of this money, and then it will turn around and loan that money to itself. That would be like me taking a paycheck, having a lawyer draw up loan documents, signing the check over to myself, and making monthly payments back to me. Now why would I do something like that? Absurd.
Perhaps the most troubling aspect to the whole sordid mess, however, is something I've brought up before: Chinese and Japanese people are not stupid. They know the U.S. cannot hope to suck $29,000 out of each and every warm body within its reach and domain without creating massive inflation. So, yet again, I pose this question: why would the Chinese, the Japanese, or anyone else for that matter, continue to lend massive amounts of money to the U.S. government, at absurdly low rates, if the only possible outcome is steep inflationary price increases and interest rate explosions?
The simplest answer is usually the best answer. They won't. Unemployment will continue to rise, the American consumer will continue to falter, credit card defaults will race skyward, and the Fed will print insane amounts of cash. Foreign governments will get wise to the situation and stop lending, and the Fed will face rapidly rising prices while trying to keep interest rates low. But how will it attract capital if it doesn't increase yields? Oh the conundrum…
For my part, I predicted the Fed would finally buy the long-end of the yield curve – although I didn't think it would be this aggressive. Nonetheless, I lightened my short position in Treasuries significantly at the end of January. I believe the herd will follow Treasuries higher for a while, but sometime in the next 3 to 6 months, shorting Treasuries is again going to continue to be the position of the century.
The other day, I was watching CNBC's Smart Money, during which several of the network's elite pondered the "mystery" of gold's advance in tandem with stocks. They batted the question around like a beach ball for a minute or two before there was a pronounced silence. Then one of them tentatively said, "Could it be because people are scared that inflation is coming back?"
Do you think?
Disclosures: Paco is long TBT, UGL, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.