Government Bond Ponzi Bubble Has To Bust

Includes: AGG, DIA, SPY
by: TrimTabs

By Charles Biderman

I cannot get over Paul Krugman’s recent comment that as long as bond buyers keep buying U.S. government debt, deficits do not matter.

Krugman said on NPR Tuesday, “The idea we should be obsessed with the deficit right now is insane, It’s crazy, the way that we created this fiscal cliff crisis out of thin air, when the government is able to borrow at just about the lowest interest rates in history.”

To Krugman, that means it does not matter that the U.S. government is running a $1+ trillion annual deficit. So what if taxable income would have to grow by 50% just to generate enough taxes to pay the current deficit. And that assumes spending will not grow from today’s levels. How can that not matter?

Here’s what Krugman is missing. The main buyers of government bonds have been the big global banks, and there is only one reason they keep buying government bonds. if they don’t keep buying they will go broke as will the government.

These are the same institutions that have been bailed out by the U.S., European and Japanese central banks. How have the central banks bailed out the big banks? Simple, The central banks “bought” all the big banks toxic loans in exchange for newly printed paper.

So when these governments sell new bonds, one guess who are the big buyers? You are correct if you guessed that the same banks that were saved by the government now regularly buy all the government bonds being sold in order to keep the financial fraud intact.

Does any of that mean that government deficits do not matter? Or does it really mean that bond buyers know that their survival is based upon buying all the government bonds being offered them.

For example the financial media wants to make a big deal that bond rates have dropped on French, Spanish and Greek debt. But what the media does not report is that interest rates are dropping because the euro banks are buying those new bonds using some of the billions given them by the ECB in exchange for their problem loans.

No Mr. Krugman, U.S. government bond buying is not happening because deficits do not matter. Bond buyers are buying because if they do not buy, their banks will go bust and they will lose their jobs.

This circular game of governments buying bad loans from banks who use the money to buy government bonds eventually will spin out of control. The widely-used expression of “kicking the can down the road” really means the governments are kicking reality down the road, praying for a miraculous economic recovery that is not in the cards. As in all frauds, the perps are hoping for a miraculous score in order to paper over their lying thieving ways.

I do not see any chance of a miraculous economic recovery anytime soon. Therefore, the entire government bond Ponzi scheme has to collapse. The only question is when. My best guess is that will happen sometime during this current Obama Administration.

And yes, the bond bust could get messy. But there is a robust underlying global economy based upon broadband that is growing rapidly. After the bust out, and we get our government obligations restructured, I predict there will be a miraculous economic recovery. But before the boom there will be a lot of pain.