This is a quick concept of what is going on under the market’s surface today. The hunter-killer submarine is USS National Debt. That’s $53T in unfunded U.S. liabilities. Evidence is pointing to the Fed front running a failure of future Treasury auctions. It is these auctions that fund the U.S. When no one steps up to fund America’s debt the system will crack like that ice sheet concealing our attack sub. China said they will not bail America out at their own expense. So who is left standing with the cash? Many of the major market participants are gone and the tri-party repo system, which fuels the stock market, has broken down. Last year in the U.S. servicing our debt was a near impossibility. Today it appears to be a universal impossibility. Ask yourself, “Is this path sustainable?”
How Treasury Auctions Work
09:15 am : Though typically overlooked, participants will take note of a $24 billion 7-year Treasury Note auction, which is scheduled for this afternoon (1:00 PM ET). Given the weak showing in Wednesday’s 5-year Note auction, participants speculate that investors’ risk appetite may be changing.
Last night’s Frontline interview with Paul O’Neill:
Can the United States government go bankrupt?
Not in the classical sense, but we could get ourselves into a position where people won’t take our paper anymore. And that’s a really desperate position to be in when we’ve killed the idea of good faith and credit of the United States. That could destroy our society as we’ve known it.
Can’t we just turn the printing press on?
Nope, because at some point people will prefer to have broken pieces of glass than federal money. … Look at the German economy in 1923. People got paid twice a day in Germany in 1923, because if they waited to spend the money that they were paid at lunchtime at dinnertime, the money wouldn’t be worth anything.
And so people were actually willing to pay all of their money, a wheelbarrow full of money, for a broken piece of shiny glass, because the broken glass was worth more than a wheelbarrow full of money. We don’t want to get there, but semi-modern societies have gotten there.
You imagine we could get there?
No, because I think we’re smarter than that, and I don’t think we’ll let it come to that. But the answer to your question is, if we don’t do something, we could get there, yeah.
The United States has a AAA rating, just shines in the night. Could we lose that?
Eighteen months ago Citigroup had a AAA rating. Could they get there?
A bank isn’t the United States government.
No, I know, but you’re asking a very radical question: Could the federal government lose its AAA rating? And the answer is yes. We dare not let that happen, but the answer is yes.
If we keep going in a straight line, the answer will be yes?
Yeah. I don’t know how we dodge the bullet if we don’t change where we’re going. …
U.S. One-Month Bill Rate Negative for First Time Since December (Bloomberg):
Treasury 10-year yields have risen for the last five days as the U.S. sells a record $98 billion in securities this week to revive the economy. The note pared earlier losses after a government report today showed the world’s largest economy shrank the most since 1980.
For the time being, fears of supply have pushed up longer- term yields despite the Fed’s buyback program. The 10-year yield has retraced more than half of last week’s 47 basis point decline when the Fed said it would buy Treasuries.
The Treasury is selling $98 billion in notes this week as part of President Barack Obama’s efforts to boost government spending to revive economic growth. Debt sales will almost triple this year to a record $2.5 trillion, Goldman Sachs Group Inc. forecast. The firm is one of the 16 primary dealers required to bid at government auctions.
UK government bond auction comes up short:
Britain experienced its first incomplete auction of government bonds in almost seven years on Wednesday, potentially dealing another blow to Prime Minister Gordon Brown’s plans to resuscitate the faltering economy.
The bank has been buying bonds from banks to provide liquidity to the financial system.
Brown was further undermined on Tuesday by King, who warned that Britain may not be able to afford new expensive stimulus plans, noting that the country’s budget deficit is expected to swell dramatically due to the economic crisis.
Shore Capital analyst Tim Morgan said the government’s overall cash requirement, including the money needed to redeem previous gilt issues, could hit 240 billion pounds.
Morgan said that Britain was running a risk of a “debt vortex” in which markets lose confidence in the ability of the UK taxpayer to meet future obligations.
“It is by no means clear that this required sum can be realised, less still that it can be raised in sterling and at current low interest rates,” he said. “The only sure way to avert debt vortex risk would be to unveil major cuts in future public spending.”
My speech to Gordon Brown goes viral:
“Every British child is born owing around 20,000 pounds. Servicing the interest on that debt is going to cost more than educating the child.”
Last night’s Frontline interview with David Walker:
Let’s start with public debt. … Give me a sense of just how bad this is.
The national debt, as we speak, is about $10.5 trillion. But the real problem is not that number. … The number that we need to be focusing on is the total federal financial hole; that’s the total liabilities in unfunded promises for Social Security and Medicare. As of the end of 2007, which is the latest set of financials that we have right now, it was $53 trillion. That’s $455,000 per household. Median household income in America is less than $50,000 a year.
What’s clear is that, while the numbers aren’t final yet for the year ended Sept. 30, 2008, for the first time in the history of the United States, the federal financial hole exceeded the total net worth of all Americans. … So we could confiscate every dime of the net worth of every American household — including Warren Buffett, Bill Gates and every other billionaire — and we wouldn’t fill the hole.
And guess what? The hole is getting deeper more rapidly than our net worth is going up. In fact, net worth has been going down because of decline in home values and because of decline in the markets. So we’re in a deep hole, and we’d better start figuring out a way that we’re going to climb out.
Conclusion
The sobering reality is even if the U.S. manages to avoid a serious depression the looming unfunded anvil of Medicare and Social Security entitlements hangs over the country. This may keep some of you up at night, but this is not a problem that lacks solutions. If it is not dealt with before it becomes another managed crisis then it’s a massive problem. What is clear is the U.S. has mastered the art of instant gratification while ignoring future threats to stability. What Americans seem to have forgotten is we own the country. This is our money and our future. No child should be born a debt slave. And no one deserves to be a slave at the expense of their education.
