In his latest missive to investors (pdf link here), Eric Sprott asks if our Ponzi economy is at risk of collapse. In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion. So who bought all the rest? According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008. With the Fed’s printing press turned off, the question for next year is whether “other investors” can buy more Treasuries than they did this year…
As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.
Sprott has over $4 billion under management, the majority of which is in physical bullion, both gold and silver.
This blog has also argued that the American economy is a pyramid scheme:
At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.
Each time Bernie’s scam got a few too many investor withdrawals, he’d simply plug the hole by raising more investor cash. The guys at Fairfield Greenwich were making so much in fees, they were happy to funnel more his way. But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.
Naturally, policy-makers sound just like Ponzi-schemers: Just give us a little more cash to get us through this rough patch and everything will be copacetic. Ben Bernkanke at the National Press Club alluded to the famous quote by St. Augustine: “Oh Lord, give me chastity, but do not give it yet.” President Obama convened his “fiscal responsibility” summit days after passing the stimulus bill and days before proposing huge increases in health care spending.
Like pyramid schemes, fractional reserve banking systems simply don’t work in reverse. “It’s A Wonderful Life” demonstrated why. There must always be new money coming into the system to refinance debts. If investors/depositors suddenly demand their money back, the system crashes.
Deflation to a central banker is like withdrawals from a Ponzi scheme. Too much at once and the scheme collapses. The Fed’s (impossible) job is to make sure it never does.
Bernanke says he’ll stop printing money to absorb debts, and he may for a time. But the American Ponzi has grown so large, the private credit system is, in my opinion, no longer capable of generating sufficient debt finance to keep it going. So to avoid a debt deflationary depression the Fed will have to rev up its printing press again.
Japan has been wrestling with its own Ponzi collapse for 20 years, keeping it at bay with trillions of dollars worth of deficit spending and money printing.
Hasn’t worked for them and it won’t work for us.