A re-post from just over a year ago and here we are today at a very similar juncture. Today the USA are non only rolling over all previous debt but are also considering raising the ceiling once again whilst Europe is going to roll over and seek somewhere in the neighborhood of E1Trillion (1 trillion Euro). So, in the spirit of our floating exchange rate sovereign currencies, only in terms of roll over and new debt, Western economies are looking to use their pension, insurance and sundry institutional funds to absorb some $2 Trillion.
Now remember, this is only what must be absorbed by all global sovereigns so as to keep our current monetary system alive. By way of comparison, this sum does not take into account any spending on, for example, pensions, health, road maintenance nor, indeed, the military or any new bail out fund that must be set up shortly. Just debt.
Begin re-post from November 2009 – and, by the way, the Fed has confirmed it is the single largest buyer of its own debt issuance… well on its way to become the single and only buyer…
This is going to be interesting.
If you read this essay and this essay, you will know I contend that we have reached the limit of how far we can expand inflation and that as a consequence, our Dollar based fiat monetary system is now broken. The most immediate concern is that deflationary environments bring about the insolvency of government.
Some of you will retort that governments have always been bankrupt but that somehow we’ve always come out ok.
What you are missing is the logic of inflation in a fiat monetary system characterized by floating exchange rate.
For as long as a government is able to borrow progressively more money, then its unfunded liabilities can be kicked down the road. Think of the pension trust fund. The money has been paid in all right. But government has used that money. Physically the money is no longer there; it has been spent. What governments count upon is inflation. Essentially, government feels free to spend today what it thinks it can repay back tomorrow in devalued currency. That in a nutshell, is what Western governments have been doing.
The above works for as long as inflation can be maintained on a positive trajectory and for as long as sovereign participants to the monetary system can and want to purchase each other’s sovereign debt (that is the meaning of floating exchange rates – i.e. the value of a currency is predicated on a basked of other currencies thus relying on sovereigns buying each other’s sovereign debt)
But pushing inflation into a system artificially, aggressively, pervasively and relentlessly over decades necessarily results in distortions, aberrations and criminal behavior. Thus, towards the end of the inflationary cycle, nominal profits progressively show up in fewer and fewer sectors until at the very end they show up only in the financial sector as the entity that is first in line for the use of fiat money.
The point at which nominal profits disappear from most sectors, is the point at which unemployment and social costs soar and is also the point at which tax revenue declines. This is the typical environment in which the power elites are also shown to be willing and consenting participants in unlawful and criminal enterprise.
Here is the problem.
As tax revenue declines, the ability of sovereigns to expand debt is hampered. On one hand declining tax revenue puts a dent in the budget that leads to credit worthiness revisions. On the other hand, as governments apply more of the tactics they think have enabled them to induce inflation into the system till recently (i.e. more spending on public projects, bailouts, military) they worsen an already critical fiscal situation.
This is the point at which sovereigns are either unwilling and/or unable to purchase each other’s debt.
The USA today have opted to increase the debt ceiling by $1.8Trillion.
Even assuming other sovereigns were willing and able to buy US debt, 1.8Trillion is a gargantuan chunk that would be tough to palm off during good times let alone during a crisis when all sovereigns are busy bailing out their own industries and banks.
Considering that the Fed has already been the purchaser of last and only resort of US debt in the past 8 months, it will be interesting to see who will buy any of this 1.8Trillion and how much of it. If the Fed should once again be the largest buyer as it has been in the recent past, the balance sheet of the entity responsible for the global reserve currency (the Fed) is going to show that the international monetary system is totally and utterly broken.