Fall of the House of Debt

Uncle Sam’s Debt Keeps Piling Higher and Higher… With No Buyers in Sight

What if you throw a party and no one shows up? Does that mean all your friends were just busy… or they just don’t like you?

It’s a legit question for Uncle Sam these days.

See, the Treasury Department is having a wee bit o’ problems selling bonds. A $20 billion auction last week for 30-year bonds saw tepid demand from traditional bond buyers. As Insider put it, waning interest in Sammy’s debt is “adding to growing alarms that the explosion in the supply of US debt could overwhelm Wall Street.”

In a language spoken by the rest of us, that means too much supply of bonds for the amount of people interested in buying.

And that’s not good.

This—this precisely!—is what I’ve been writing to you about for many a month now. The idea that our debt-addled uncle is so deep in hock these days that his long list of IOUs is causing problemos. Indeed, because of the weakening demand, interest rates on Uncle Debtster’s 30-year bonds jumped to 4.856% from 4.736%.

Twelve basis points is what Wall Street calls that difference.

Seems small.

It is, in nominal terms.

But in dollar terms, those 12 measly basis points add $17.6 million to Uncle Sam’s repayment costs each year over the 30-year life of that $20 billion bonds.

That, however, is just one exceedingly tiny tranche of debt.

Treasury runs auctions all the time as it juggles America’s $33 trillion-plus debt.

Not that this is a fair way of calculating the impact, but if we apply those 12 measly basis points to all $33 trillion… well, Samy the Mouch is on the hook for an additional $29 billion in interest payments every year. Even when you’re counting in trillions, $29 billion ain’t a hill o’ beans.

So can we now please yank the plug on the lifeline keeping alive the absolute asinine premise that debts and deficits don’t matter when you own the printing press?

Ivy League thumb-suckers pushing New Age economic texts might want to buy into the bag of theoretical BS. But where the dollars meet the bond market, the real world is telling the Ivy Leagues to pound sand.

The notion that government can run up all the debt it wants is just stupid from the outset, and was always going to fail in real life. I mean, communism makes sense on paper… but apply it across a society and it will always fail because the philosophy is essentially a race to see who’s the laziest.

What the debts-don’t-matter think-tankers fail to realize is that here in the real world, people putting their money to work have options. They don’t have to buy the bonds of an egregiously overindebted government. To them, debts and deficits very much matter, regardless of a country’s powers of taxation. They rightly worry that rising interest rates will ultimately drive up the cost of debt servicing to such an extent that it threatens a debt-fueled monetary crisis.

Which is exactly what we’ve seen begin over the last 18 months of Federal Reserve rate hikes. That has pushed America’s debt payments to more than $700 billion from about $450 billion a year earlier. Next year will be even worse.

As debt-servicing costs rise, government must print more and more money to cover the interest payments. Which means it must then print even more money to cover the interest payments on the debt it just sold to cover interest payments on the previous debt.

And if the Fed is pushing up interest rates all along the way—as it’s still threatening to do—that just exacerbates the problem by requiring Uncle Sam to sell more debt than he expected, which increases his interest costs more than expected. See $700 billion vs. $450 billion for proof…

Again, the Ivy Leaguers can lay out all kinds of magical reasons why none of this matters when government holds the power to print money and tax at whatever rate it likes.

Sure, whatever you say, Prof. Knonuthin.

But the bond jockeys who vote with their wallet are telling you that analysis is so flawed that teaching the belief should be considered an educational war-crime.

We end up right where we are today: A bunch of Ivy Leaguers who, over the last 40-ish years, have trained D.C.’s dumbest to believe in a unicorn economy, where printing as much money as you want has no negative effects… and, oh, by the way, will help you win reelection because you can buy votes with all this magical money you’ve summoned.

Well, now the chickens are coming home to roost. Only, they’re no longer chickens.

Somewhere along the road, they morphed into vultures who are picking apart America, one bloated interest payment at a time. And just a few short years from now, American politicians are going to wake up and realize—much too late—that they’ve steered the nation into what could very well be an economy that gives the Great Depression a bookend at the tail-end of the 2020s.

By the way, this is why gold prices refuse to collapse amid inflation, which textbooks insist is bad for gold.

Alas, gold prices don’t care about textbooks. They care about the bigger picture.

And that bigger picture is why bond buyers are beginning to skip Uncle Sam’s debt-auction parties.

More to come, because this could get ugly…