When the U.S. Treasury Bond Bubble Finally Explodes

The U.S. government borrows more than $40,000 per second.  You’d think running up the credit cards at such a rate would be great fun.  Yet, as far as we’ve made out, there’s nothing much fun about it.

Who knows?  Perhaps within the beltway, where the mountebanks in Washington go about bankrupting the nation by doling out free drugs to the populace, it’s one heck-of-a good time.

For those of us who aren’t loaded on prescription meds, however, a stench emanates from D.C. like wafting odor from freshly laid horse puckey.  Somehow, Congressmen believe if they borrow just a little bit more, and saddle us up with more debt and more idiotic laws, everything will be hunky-dory.

According to Treasury Secretary Timothy Geithner, the United States borrows $125 billion per month.  “With that amount,” notes Reuters, “the United States could buy each of its more than 300 million residents an Apple Inc. iPad.”

Depending on your idea of a good time, a free iPad courtesy of the government may help win over your vote.  But for those who stop to think, and consider their kids will be paying for it – plus interest, the thought of a government sponsored iPad is an insult not a benefit.  Likewise, free drugs should be an insult too.

More Debt Limit Reflections

Since 2001 Congress has raised the debt limit 10 times.  Until now, getting the votes to do so has been merely a formality.  But this time things have changed.  Enough Congressmen have been elected to do something different – like reduce spending – and now the Obama administration has a problem.  How did we get here?

Congress passed the Second Liberty Bond Act was in 1917, which established the first statutory limit on U.S. public debt.  We couldn’t find what the debt limit was first set at, but we imagine the Treasury Secretary at the time, William McAdoo, would have soiled his pantaloons if someone had told him that in less than 100-years it would balloon to over $14 trillion.

But regardless of what the first debt limit was, one thing is certain…it wasn’t enough.  A little bit more was always needed.  Every time the debt limit was reached, Congress just raised it up higher.

Sometime around 1980 the national debt tipped over $1 trillion.  Then, in 1981, President Reagan stated that a stack of $1,000 bills equivalent to the U.S. government debt would be about 67 miles high.  “Since then,” reported Reuters, “the national debt has climbed to $14.3 trillion.  In $1,000 bills, it would now be more than 900 miles tall.”

But that’s nothing…

“In $1 bills, the pile would reach to the moon and back twice.”

When the U.S. Treasury Bond Bubble Finally Explodes

Currently, the national debt is at $14.3 trillion and the GDP is at $14.7 trillion.  As you can see, the national debt in relation to GDP is rapidly approaching 100 percent.  We don’t know what will happen when it does hit 100 percent…we’ll just chalk it up as one more milestone on the road to hell.

Yet before we can even begin to make a dent in the national debt, the deficit has to be eliminated…and then some.  Tax revenue must exceed spending so that there’s some money left over to pay down the debt.  Nonetheless, just eliminating the deficit is a mammoth task in itself.

The deficit for fiscal year 2011 is projected to equal $1.4 trillion.  That’s a lot of borrowing to barely cover one year.  To put it another way, what this means is the government currently borrows $0.40 of every $1 it spends.  Obviously, this cannot go on forever.  While the United States will be afforded more leniency with its creditors – namely China and Japan – than most other countries, a national debt in exceedence of 100 percent of GDP is not without consequences.

For example, in Greece, where national debt is approaching 170 percent of GDP, their national debt rating was downgraded by Fitch further into junk status last Friday.  Then, on Saturday, Standard & Poor’s warned that Italy, where debt is at 140 percent of GDP, was in danger of having its debt rating lowered if it could not reduce borrowing and improve economic growth.

Yesterday, yields on 5-year and 7-year treasury notes fell to 5-month lows as European lenders fled Greek, Italian, and Spanish debt like rats from a sinking ship.  In the short term, this helps the U.S. finance its borrowing.  Though this should provide little solace.  At some point, unless the U.S. changes course, its debt will be the scourge of markets too.

That’s when the U.S. Treasury bubble finally explodes.


MN Gordon
for Economic Prism

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