Debt and Delusions – Part Two

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by Gary Christenson, Deviant Investor:

The problem with debt is the creditor expects to be repaid.

Sovereign debt will be “rolled over,” never extinguished, and repaid with new debt. We delude ourselves and pretend total debt will increase forever (it can’t). That explains global debt exceeding $230 trillion today and official U.S. government debt over $21 trillion, with unfunded liabilities adding another $100 – $200 trillion. There are two choices.

Behind Door # 1 lives the default dragon. The consequences of releasing the default dragon upon the financial world are frightening and difficult to comprehend. What happens if the U.S. government says the following in circumspect language?

“Sorry. We lied. We had no intention of paying you. You were foolish to trust our promises. The courts will handle your bankruptcy. Good luck with your other investments.”

The fallout would be unbelievable—on a global scale. Assume it will NOT happen.

Behind Door # 2 lives the Inflation Monster. Suppose the Treasury issued new 10 year notes and found no buyers at 3%, or 4%, or even 5%, which sounds unthinkable, but 5% is low based on decades of history.

Enter the Federal Reserve! We hear the musical theme from the approaching shark in “Jaws” as we watch in terror. The Fed monetizes a few trillion dollars of government paper as quickly as a politician issues a denial.

The Fed will monetize U.S. government debt, as they bailed out the bankers after the banker induced crash of 2008.

Expect their balance sheet to increase, regardless of distracting nonsense from Keynesian economists. During the next crisis the Fed will buy $trillions in debt to “fund” U.S. government budget deficits.

From David Stockman

“And this time it’s truly not hard to see the great bond market “yield shock” coming down the pike. That is to say, when $1.8 trillion of supply—$1.2 trillion new debt from the US treasury and $600 billion of old debt to be dumped by the Fed—hits the bond pits in FY 2019, the markets will definitely clear or perhaps “clear-out” is a better word.”

Buying government debt, or the Treasury “printing” dollars, is reminiscent of Zimbabwe, Argentina, and banana republics. Gold and silver fared well during their memorable inflations.

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