The U.S. Economy: Riding the Debtors' Merry-Go-Round

Includes: AGG, DIA, SPY
by: Jeff Nielson

Japan buys U.S. Treasuries, the U.S. buys British bonds, and the UK buys Japanese bonds. All these auctions are “covered,” which means these Three Amigos have no problems with their massive debts – right?


The whole point is that playing this debt “shell game” solves nothing. The paper of all three of these nations is worthless, or is rapidly approaching that point, since none of the three is capable of repaying a penny of all this new debt. “Buying” worthless IOU's using worthless IOU's (the fiat currency of an insolvent economy) is a transparent sham which even the comatose, market sheep will ultimately notice, eventually.

For any who would choose to dispute this, please explain how it would be any different if these three debtors simply “bought” all of their own bonds? The fact is that nothing changes. Simply putting different “labels” on worthless bonds doesn't change the fact they are worthless. Clearly, China has seen through this sham.

The latest TIC report shows that China was a net seller of U.S. Treasuries for the second consecutive month. This followed a previous six-month period where China purchased U.S. Treasuries at the slowest rate in a decade. This has now become a trend. China is ridding itself of U.S. debt – and where China leads, many others are sure to follow.

It should surprise no one that, on the same day that it was announced that China was selling rather than buying U.S. Treasuries, gold would leap higher and the U.S. dollar would plunge. The majority of the sheep still labor under the delusion that U.S. Treasuries, and even the U.S. dollar, represent “security.” This delusion is fortunate for those of us accumulating precious metals – since if all the sheep tried to acquire the minimum 5%-10% holding of precious metals which most analysts are (once again) recommending, the price of precious metals would go ballistic, and there would not be near enough gold and silver for us all to get our share.

The precious metals “window” is closing rapidly. Central banks have switched from being huge sellers to net buyers of gold. More importantly, we move closer and closer to the “point of no return” for the huge debtors. What if China dumps Treasuries for three months in a row? (Or six? Or twelve?). One of these occasions will be “the straw that breaks the camel's back,” and then the stampede out of these worthless currencies will really begin.

In the meantime, the teetering mountains of paper of the Three Amigos get closer to toppling every day. All it would take is for one of this trio to decide to attempt to pull-back from the Hyperinflationary Abyss. If this debtors' shell-game turns into simply a pair of countries each “buying” all of the other's bonds, one would assume that even the most obtuse sheep would begin to see through that farce.

For the debtors themselves, the longer they succeed in their current game, the worse the crash – when the merry-go-round stops. The only thing worse than holding a trillion dollars of worthless paper is to hold two trillion (or five, or ten). Keep in mind that in this slow-motion descent into hyperinflation that the Three Amigos will have to dramatically increase their “buying” of these worthless bonds – since all three are facing exponential increases in their debt-levels.

In the case of the U.S., the ridiculous mythology of the Obama regime is that the U.S. will somehow, magically, “balance the budget,” nearly a decade from now. To begin with, a decade from now, the U.S. government will be facing $3 trillion-per-year deficits just from the interest payments on its debts, and from the U.S.'s $70 trillion in “unfunded liabilities” rapidly turning into current debts.

Obviously, a government which has had to steal $100's of billions per year from its trust funds (see "U.S. Government Squanders Trust Funds") to stop the economy from imploding before those massive debts even come due has absolutely no possibility of avoiding complete implosion when those “unfunded liabilities” must be funded.

Thus, the absolute maximum survival period of the U.S. economy is somewhere below ten years from today. As I have pointed out previously, John Williams ( has re-evaluated his own forecasts of the U.S. economy, and believes there is a real risk of U.S. hyperinflation this year. From that point, the time until total U.S. economic implosion would be measured in months.

For people who keep hoping to acquire precious metals at cheaper prices, or for the more thoroughly deluded – who have not even begun to protect themselves from the economic cataclysm ahead, you are playing a game just as dangerous as those played by Wall Street and the U.S. government: you are gambling with your future. The difference is that unlike Wall Street and the U.S. government, for most individuals it is still not too late to save yourselves.

China, the nation with the largest trade and budget surpluses on Earth, has stopped buying U.S. bonds, at a time when the U.S. government will be dumping record amounts onto this over-saturated market for many years to come. It is the simplest of arithmetic to observe that there can't possibly be buyers for more than a tiny fraction of this debt. The only alternatives are default or hyperinflation (and then a worse default).

The disconnect between this market and the real world is very similar to the current disconnect between the U.S. housing market and the real world. At a time when there is the greatest over-supply of housing in U.S. history, the Obama regime has just created a second bubble for this market – as the U.S. government replaced U.S. banks as the “new sub-prime lender”. More than half of all U.S. homes purchased last year effectively had zero down-payments (see “The U.S. Government's Zero Down-payment Mortgages”).

Meanwhile, millions of foreclosed homes are being held off the market (artificially reducing supply, and artificially propping-up prices). Millions more homes are in the “foreclosure pipeline,” with no hope of those loans becoming current again. Millions of U.S. mortgage-holders are “underwater” and millions more U.S. homeowners will go “underwater” (or simply default) when their “option-ARM” mortgages reset this year and next. Millions more U.S. homes will be dumped onto the market by desperate senior citizens, trying to maintain their standard of living with retirement nest-eggs which are far too small.

Real estate is the only major asset for these people (see “U.S. Pension Crisis: the $3 Trillion Question”). If they dump their real estate to fund their retirements, it means even more devastation for the U.S. housing market. If they don't dump real estate, but simply (severely) “tighten their belts” that would torpedo those retailers who manage to survive the current retail sector collapse.

There is no “brighter future” where the U.S.'s currently unmanageable deficits will magically become “manageable”. If the U.S. can't “balance its budget” today (and it obviously can't) there is zero possibility of it ever being able to do so in the future. The problems of the UK and Japan are very similar, but at least they don't have a gigantic Military Albatross dragging them down.

Continuing to believe the propaganda that the U.S. economy can be salvaged, when the facts are both so dire and so clear is inexcusable. As I observed in a recent commentary, “citizens” take responsibility for their own futures. Only “serfs” mindlessly rely upon their overlord for protection.

The truth is so obvious that the U.S. Treasury Department is hiding the only honest (once-a-year) budget calculation it performs on the U.S. economy (see “Treasury Department Stalls Budget Report”). This calculation is done using the same GAAP accounting principles which all U.S. corporations are required by law to use. It eliminates all of the accounting lies and gimmicks which the U.S. government uses to distort the truth.

This report is mandated by statute and is released every November. This November, the U.S. government simply announced that the report would be delayed until February. There can be no possible excuse for a three-month delay in this report. None of the other statistical calculations of the U.S. government (i.e. the fraudulent ones) have been delayed – at all.

The U.S. government desperately wants to hide this information from the world – even though its own propaganda-machine never publicizes this calculation. What could be so terrifying to the U.S. government? The truth, naturally.

All through the years of mismanagement of the Bush regime, the real deficits averaged over $4 TRILLION per year. Last year's real deficit was $5.1 TRILLION. John Williams is estimating that the calculation for fiscal 2009 (which ended last summer) will show a deficit approaching $9 TRILLION.

It is now February, and this report is nowhere to be seen. As I said at the time, I doubt we will ever see it. For those “citizens” who choose to live in the real world. U.S. debt is a massive, ticking bomb – which cannot possibly be defused. Those serfs who allow themselves to be mesmerized by the debtor's merry-go-round will be the architects of their own demise.

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