For years, many had feared that it would be China that would start dumping U.S. government debt, but now it turns out that Japan is going to be the real problem. Right now, Japan is the second largest foreign holder of U.S. government debt. Japan currently holds about $882 billion in U.S. Treasury bonds and they are likely going to have to liquidate much of that in order to fund the rebuilding of their nation. So needless to say they won't be accumulating any more U.S. government debt. But the U.S. government still needs to borrow a trillion and a half dollars from someone every single year. So where in the world are they going to get it?
This is called a debt problem. Have you ever gotten to the point where you are in debt up to your eyeballs and nobody wants to lend you any more money?
Well, the U.S. government is rapidly reaching that point.
Even before the crisis in Japan, several of the big boys had starting moving away from U.S. government debt.
PIMCO, the biggest bond fund on the entire globe, recently acknowledged that they are dumping all of their U.S. Treasuries.
So if foreign nations like Japan are not gobbling up U.S. government debt and big bond funds like PIMCO are not buying any of it, then who in the world is going to be purchasing the massive amounts of debt that the U.S. government is constantly pumping out?
Well, many of you already know that answer.
The Federal Reserve is going to step in of course. The Federal Reserve knows that if the U.S. government cannot borrow gigantic quantities of money at super low interest rates it will go broke. So the Federal Reserve is just going to keep buying up most new U.S. government debt. It is just that simple.
But isn't that a Ponzi scheme?
Of course it is. Let's not mince words here. It is a total scam.
And it is a scam that cannot go on indefinitely.
The truth is that the Ponzi Scheme of the U.S. Treasury issuing bonds and the Federal Reserve buying them up cannot last forever as PIMCO's Bill Gross noted in his March newsletter....
"Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t."Gross also noted in his recent newsletter that the Federal Reserve is currently buying up about 70 percent of all new U.S. government debt.
So now that Japan is out of the picture, how high will that figure go now?
Over the past several weeks there has been all kinds of speculation about whether "quantitative easing" will be extended past June or not.
Well, whether they call it "quantitative easing" or not, the truth is that the Federal Reserve is going to have to continue to "buy" most new U.S. government debt or the system will crash.
We have gotten to the point where the U.S. federal government cannot continue to function without Federal Reserve monetization of the debt.
This is a sign that we are rapidly approaching the financial endgame.
So why doesn't the U.S. government just stop spending so much stinking money and stop getting us all into so much debt?
Well, because there isn't enough political will in Washington D.C. to do any real budget cuts, and if our politicians did balance the budget at this point it would crash the economy.
Just the other day, the U.S. House of Representatives passed a continuing resolution to fund the federal government that would cut 6 billion dollars from U.S. government spending.
On that exact same day, the official U.S. national debt figure rose by 72 billion dollars.
Now the debt normally does not go up that much on a typical day. But what this example does show is the losing battle that our politicians are fighting.
On Wednesday, U.S. Treasury Secretary Timothy Geithner warned a House of Representatives appropriations subcommittee that they should not even think about not raising the debt ceiling....
"Congress has to do it. There's no alternative."The truth is that the U.S. government has to keep going into more debt. Under the current system the alternative would be to collapse the economy.
But the debt that we have already piled on to the backs of future generations is absolutely criminal.
How mad do you think future generations are going to be with us for heaping 14 trillion dollars of debt on to their shoulders?
Talk about a debt problem!
But this is what we get for allowing a private central bank to run our financial system. This debt-based system was designed to fail from its very inception.
The man supposedly "in charge" over at the Federal Reserve, Ben Bernanke, has a track of record of incompetence that is absolutely staggering. It is a mystery why our representatives in Washington D.C. are not howling for his resignation.
Instead, most of our politicians continue to express blind faith in our current financial system and they continue to insist that everything is going to be okay.
Well, everything is not going to be okay. The Obama administration is projecting that the federal budget deficit for this fiscal year will be an all-time record 1.65 trillion dollars.
Of course they are also trying to convince us that budget deficits will go down in future years, but by now we should all know not to trust the rosy future projections of government officials.
After all, it was only a few short years ago that Bush administration officials were promising that we would be swimming in huge budget surpluses by now.
The truth is that the government has been lying about all of this for a long time. For now, the Federal Reserve is just going to keep monetizing U.S. government debt for as long as it can.
This Ponzi scheme will keep on working and working and working until someday it simply doesn't anymore.
When that day arrives, the U.S. government debt problem is going to unleash hell on world financial markets.