Wednesday, October 10, 2012

Ponzi Scheme Government


Ponzi Scheme Government (via http://www.economicnoise.com)
It is interesting to go back and look at thoughts and interpretations of events from the past. Sometimes it is embarrassing. This post from almost three years ago, seems rather accurate in light of subsequent developments. The Ponzi Scheme that government had become only continued, as expected. At…


At that time three alternatives were reviewed with respect to how government would deal with its economic and financial crisis:
  • Live Within Its Means
  • Continue To Print Money
  • Stop Printing Money
Ben Bernanke chose the second alternative. His recent announcement of “QE until the cows come home” is nothing more than a continuation of what was expected three years ago.  Here is the article, unchanged from December of 2009. It is as applicable today as it was then. The only difference is that we are more deeply committed to inflation and closer to the likely hyperinflation that will destroy our society:

“… all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different.”Sprott Asset Management

is akin to belief in Santa Claus. Both make us feel better, but both are unlikely. We may have another quarter or two of government-driven GDP growth, but we will not have a recovery, at least not with the next several years. Government spending may be able to raise GDP, but the ability to continue spending is near an end.

The government has no money and diminishing possibilities for continued borrowing. The chart to the left shows rapid decreases in debt support from foreigners. Without foreign funding, the government will be unable to spend at anywhere near current levels. (Of course, the possibility of “printing” money might provide a short-term extension before the dollar collapsed and/or hyperinflation occurred.)
Sprott Asset Management issued a report entitled “Is It All Just a Ponzi Scheme?”( Sprott December.pdf). The report addressed the unsustainable financial situation:
We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market.
The chart to the right shows the decline in China’s purchases of US assets. Additional background on China can be read here.
For decades, the political establishment avoided the cleansing economic effects of recessions by stimulating the economy. Each attempt created more economic distortions and required yet bigger stimuli. Coupled with expanding government spending and social obligations, the government went deeper and deeper into debt.
The economic crisis in 2001 should have terminated the ability to continue this game. However, a Houdini-like escape was engineered by a massive credit expansion. This expansion fueled multiple economic bubbles, all of which were historically unprecedented. The inevitable collapse of some precipitated our current economic downturn.
Once again, we are desperately engaged in another effort to thwart a necessary purge of the economic system. It is likely that it will be impossible for another stimulus-based recovery. After decades of such efforts, we are out of bullets. The debt and social obligations became impossible to service more than a decade ago. But politics is not played like poker or roulette. Politicians play with our money, not their own. Personal political survival is all that counts, no matter what the odds or cost. Folding one’s hand is political suicide. Thus the game will continue until the economy turns around or collapses. The odds strongly point toward collapse.
Sprott described the situation as follows:
As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.
Sprott focused on the inability to sustain current government borrowing, which looks like it is slowing rather quickly. In many respects it is surprising that it has taken so long for markets to exact this disciplinary force. Given the debt and social obligations, the Federal Government became incurably insolvent years ago. That was known by many, yet foreign financing continued to support additional deficits. Perhaps now that we cannot generate the mass trade deficits with China, China has both fewer resources and less inclination to continue to be our banker.
Karl Denninger actually takes a stronger view on Sprott’s idea of a Ponzi scheme:
Or is the truth that there were in fact no buyers for upwards of half of the total Treasury issue in the last year and it was instead monetized – one third openly via Federal Reserve “open market” purchase, and the other two-thirds via “covert” or “stealth” means, complete with bucketing the alleged “buyers” into categories in The Fed’s and Treasury’s data releases?
Rather large movements up in Treasury interest rates in the past week or so may indicate that markets have finally focused on the fact that real buyers are diminshing.
If the government can no longer finance its deficits overseas, there are two probable alternatives left. Alternative 1 is living within its 
means. That involves cutting government spending back to levels that can be covered by tax revenues. There is nothing to suggest that the political will or courage exists for such cuts. Alternative 2 is to engage in quantitative easing (money creation) to fund the deficits. This alternative is highly risky in that it raises the real possibility of hyperinflation which would destroy the economy.
A third alternative is possible but highly unlikely. That would involve the Federal Reserve telling the government that they are through buying Treasury bonds (quantitative easing), and the government can no longer count on them as “papering over” their deficits. Such action would either force the government into sovereign bankruptcy or force them to shrink back to spending levels that would be funded by tax revenues. Although the Fed was made independent just for such situations, does anyone believe they are still independent enough to actually execute such a maneuver?
In my opinion, we end up with Alternative 2. One can only hope that this route is abandoned prior to hyperinflation. If so, we then default back to Alternative 1 or 3.

http://www.economicnoise.com (http://s.tt/1nYqD)


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