Lately I have featured David Stockman, who refers to our alleged recovery. He is alarmed by the effect of the new round of tax cuts on America's out-of-control public debt. MSNBC's Dylan Ratigan, who also thinks the recovery is a sham, sat down with Stockman to discuss upcoming 1.4 trillion dollar deficits and massive expansions of government debt.
But before we watch the video, it is important to understand why we might care about the debt. I described some of those concerns in The Biggest Ponzi Scheme Ever Conceived, from which I now quote—
Government bond issuance differs from run-of-the-mill Ponzi Schemes created to rip-off investors for private gain. In the government case future economic "growth" is assumed to pay for current financing needs, as Bill Gross points out. Taking a benign view, we might look upon such debt financing as a Ponzi Scheme undertaken for a good cause—higher standards of living in the future.
However, sometime in the last decade—we had a balanced budget in the year 2000—government debt financing grew disproportionately large just as the structural basis for economic growth was being undermined (e.g. by the Housing Bubble, by growing Medicare costs). With growth in doubt, as Gross said, there is no longer a sound basis for continuing the previous arrangement. The typical "benign" Ponzi Scheme governments routinely engage in has thus become a malignant cancer in the United States, and may now be perceived as a danger to those vested in it (listed below).
Ponzi Schemes collapse when participants refuse to roll over their investments, seeking to cash out instead. Alternatively, a Ponzi Scheme will collapse when new participants can no longer be found, and current investors refuse to up the ante. However, that's not a problem in the case of our federal government now that our Central Bank has stepped in as the buyer of last resort.
A pure Madoff-style Ponzi scheme collapses when new investors can not be found whose money can be used to pay out too-good-to-be-true returns to previous investors. In the government's scheme, another type of failure exists in which our creditors will only loan us money at exorbitant interest rates (8-10%) to hedge their risk. We see this today in Greece and Ireland. Interestingly, the new round of tax cuts seems to have caused yields on the benchmark 10-year Treasury note to rise.
The benchmark 10-year note's yield touched 3.564%, the highest level since 3.611% on May 13.
"People are repricing for a better economic outlook with better data and stimulus from both the monetary and fiscal sides," said David Coard, head of fixed-income trading in New York at Williams Capital Group...
The 10-year note's yield, a benchmark to set U.S. consumer and corporate borrowings, has surged about 130 basis points from this year's trough in early October. The yield had risen about 40 basis points since Dec. 7 when it broke above 3%.
Coard said he expects the 10-year yield to trade in a range of 3.25% and 3.6% in the short term. That has been sharply higher than just a month ago when many market participants expected a range of 2.5% to 3%.
Is the rise in 10-year yields a sign of things to come? That's the important question. Perhaps the recent surge in bond yields is just another sign of Chaos In The End Times.
Alternatively, should the American economy start to grow in earnest, as measured by phony GDP fueled by government borrowing or money printing, investors might demand higher and higher rates of interest on the money we borrowed to fuel the growth. In that case, rising interest rates might destroy that very recovery. We can easily imagine a situation in 2020 in which the federal budget contains only three large line items—health care payouts, defense spending and interest on the debt.
I don't think we'll get to 2020 without some hugely disruptive fiscal upheaval as described above. Once the $858 billion of unaffordable tax cuts are signed into law, the debt countdown begins.
National Debt Clock
Although the debt clock has been running at a furious pace for years now, I believe (along with Stockman) that we have just reached a turning point. At issue here is whether the United States can act in a completely irresponsible manner forever without punitive repercussions. That is simply impossible, as history clearly shows. There is no Free Lunch. Some day soon, the United States will have to pay the piper.
One scenario I have not discussed here is America hyper-inflating its way out of the debt. The idea that we will go the way of the Weimar Republic is so horrific that it requires no additional comment from me.
That sets the context for Ratigan/Stockman video. Watch it and weep.
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