The Great Depression Online

Great Depression Online Archive Issue:

Downgrading U.S. Inc.

Great Depression Online
Long Beach, CA
May 26, 2009

Inside This Issue You Will Discover…

*** Swimming Naked
*** Choking On the Morning Coffee
*** Downgrading U.S. Inc.
*** And More

“We must not let our rulers load us with perpetual debt.  We must make our election between economy and liberty or profusion and servitude.” – Thomas Jefferson 

Swimming Naked

To borrow money is to borrow from your future.  For the debt you take on today will be a tax on your income tomorrow.

This, of course, isn’t a problem if the debt acquired today helps boost your income tomorrow…paying it back will be a piece of cake.  But if your income drops and you borrow money to keep up your standard of living, you are only setting yourself up for future financial misery.

Everyone knows that borrowing money and investing it at a higher rate of return, or in an appreciating asset, is one of the oldest tricks in the book for rapidly building wealth.  This is known as leverage.

Leverage, obviously, works great in a boom period…making temporary fortunes for fools and apparent geniuses of reckless idiots.  But as Warren Buffett once noted, “It’s only when the tide goes out that you learn who’s been swimming naked.”

~~~~~~What You Must Know~~~~~~

Nikolai Dmitriyevich Kondratiev was an economist who was in the wrong place at the wrong time.  Caught up by Bolshevism in Russia, he undertook a grand study of capitalist economic cycles.  Alas, his research seems to have taken him exactly where Stalin didn’t want him to go.  He was executed by a firing squad in Stalin’s Great Purge of 1938.  But before going to his grave, Kondratiev published a number of essays explaining the inescapable patterns of capitalist economies.  Discover how you can turn Kondratiev’s work into the biggest profit windfall in three generations.  Learn more here: What You Must Know.


And when the tide went out in 2008, the Treasury opened the public purse to bailout everyone caught swimming with their pants down.  What are the consequences of this undertaking?  How will borrowing from the future influence the future?  And is U.S. Inc. too big to fail?

These are some of the questions the credit markets are now asking.  And here, in simple GDO fashion, we’ll explore what it all means.

Choking On the Morning Coffee

There are only two ways for the government to fund its deficits – by borrowing money from lenders or by borrowing money from the Federal Reserve.  The first way is honest, though not always desirable.  The second way is deceptive.  The first way involves an open capital market transaction.  The second way involves printing money up out of thin air.

Typically when a nation’s deficits as a percent of GDP exceed 6 or 7 percent, lenders will demand a higher rate of interest to compensate for the higher rate of risk.  The U.S. budget deficit for this year’s projected to be 12.9 percent of GDP.  Hence, lenders should be demanding a higher rate of interest.

But the government doesn’t want higher interest rates because they’ll further drag down the already slumping economy.  So to maintain demand for Treasuries, the Federal Reserve is now buying them.  Where does the Federal Reserve get the money to buy Treasuries?

The answer, regrettably, is so unconscionable it’ll make an honest man choke on his morning coffee…  It just makes a notation in its ledger and – out of thin air – magically has the money to buy Treasuries.

This expansion of the money supply is, by definition, inflationary.  And when investors fear inflation they sell Treasuries; they don’t buy them.

So regardless of whether the government funds its deficits by borrowing from lenders or by borrowing from the Federal Reserve, Treasuries will be sold until interest rates rise to compensate for the added risk of nonpayment or inflation.

Downgrading U.S. Inc.

On May 21st, MarketWatch reported that…

“The Fed bought $7.398 billion in Treasurys [sic] on Thursday in its third such operation of the week.

“Dealers submitted $45.694 billion in debt maturing from 2013 to 2016 to be bought, by far the most ever tendered for operations of any maturity range.

“The last time the Fed bought from this segment, on April 27, it purchased $7.025 billion, of about $23.4 billion offered.”

In other words, dealers wanted to sell nearly twice as many Treasuries on May 21 than they did on April 27.  Perhaps this is because lenders are becoming increasingly suspicious of U.S. Government debt.  In fact, the yield on 30-year bonds has spiked up to 4.31 percent, from 2.68 percent at the beginning of the year.

In addition, Bill Gross, aka The Bond King, told Bloomberg TV last Friday that the U.S. will eventually lose its triple A-rating.

Here’s why…

The U.S. national debt has topped $11.3 trillion.  And the U.S. 2008 GDP was approximately $14.2 trillion.  Yet, as Gross points out, debt approaching 100 percent of GDP, is the “level at which country downgrades tend to occur.”

In 2009 alone, the U.S. budget deficit’s $1.8 trillion.  That’s $1.8 trillion added to the national debt that’s already over $11.3 trillion.  But that’s not all.  From 2010 to 2019, the Obama administration has projected annual deficits totaling $7.1 trillion.  Thus by 2019, the national debt could be over $18 trillion – or more.

So unless the economy turns around and the GDP grows an extra $4 trillion by 2019, the U.S. national debt will reach 100 percent of GDP sometime before 2019.  And its credit rating will be downgraded accordingly.

In summary, for generations to come, the U.S. citizenry will spend an increasing portion of its income to pay the increasing interest on government debt.  Moreover, servicing this debt will act as a tax on the economic growth of the country.  This means future generations will pay more of their income to their government, and will invest more in their country, and in return they’ll receive a declining standard of living.

Alternatively, the wheels could come off the whole shebang in a calamitous upheaval.  Then things would really get ugly.


M.N. Gordon
Great Depression Online

P.S.  Fortunately for those with the foresight and guts to take matters into their own hands, they’ll turn this debt induced economic crisis into the biggest profit windfall in three generations.  While the economy sails over Niagara Falls, you’ll be sitting safely on the shore above.  Start Building a Legacy of Wealth Today.


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