Insatiable US Debt and Other Jokes

Yesterday, the Dow dropped 139 points…with all 30 Dow stocks lower.

Gold lost $31. It seems to be heading towards $1,500…or maybe $1,400…or lower!

But don’t expect us to do any serious thinking this week. We’re celebrating 12 days of Christmas. And we’ve got 7 more to go.

The holidays don’t stop us from having an un-serious thought or two, however. For example, later in the week, we’re going to give you our predictions for 2012… You need to be prepared…in case the world doesn’t end on schedule. Who knows, maybe the Mayans miscalculated?

Here’s a prevue:

Stocks will go down. Gold will go down. The dollar will go up.

The US may be going broke, but perversely, people want dollars…and US Treasury debt. It’s the only thing they can count on. If the feds ever run out, they know they can depend on Ben Bernanke & his central banker friends to give them more.

Here’s the Bloomberg update:

The US government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.

The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The US drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.

While Standard & Poor’s stripped the US of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more returned 25.6 percent this year. The spreading sovereign debt crisis in Europe and slower global growth are driving investors to the safety of US assets, helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses.

“If the last two weeks are any indication of how next year will start, there’s near-insatiable demand,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at auctions, said in a Dec. 21 telephone interview. “We have a significantly shrinking supply of risk-free assets in the world and US Treasuries are one of the few left.”

Yeah, yeah…insatiable demand.

We’ve heard that before. In 1999 there was an insatiable demand for stocks. Remember, there were 70 million baby boomers preparing for retirement. What choice did they have? They had to buy stocks, right? Wrong…stocks went down in January 2000. In real terms, they’re considerably lower now — depending on how you adjust for inflation.

Then, in 2005, remember the insatiable demand for housing? More immigrants. More families getting richer. Everyone wanted to get on the housing ‘escalator’ before it was too late.

But in 2007 it turned out that investors were already satiated. They had enough housing…and housing debt.

And now, demand for US government debt is ‘insatiable.’


But wait? Aren’t we implying that US government debt is in a bubble. Doesn’t that suggest that it will soon go down?

Yes. Well…maybe. US government bonds are in a bubble…with the highest prices and lowest yields in more than a century. But bubbles do not necessarily blow up right away. It can take time for the pin to approach…

And Mr. Market is a pretty cunning old fellow. Our guess is that he will want to draw more of the world’s wealth into the US bond market…before blowing it up.

Does that mean you can safely buy US bonds in 2012? Not at all! Stay away…far away… Bubbles are always dangerous. And a bubble in the world’s reserve asset — US dollar-denominated debt — is the most dangerous ever. When it blows…penguins at the South Pole will have to cover their ears. Deaf people will complain about the noise. And the shock wave will knock down a large part of the entire world’s capital structure…

Beware, dear reader, beware…

Here’s how government really works. The insiders get richer; the outsiders get poorer. The New York Times has the story:

WASHINGTON — When Representative Ed Pastor was first elected to Congress two decades ago, he was comfortably ensconced in the middle class. Mr. Pastor, a Democrat from Arizona, held $100,000 or so in savings accounts in the mid-1990s and had a retirement pension, but like many Americans, he also owed the banks nearly as much in loans. Today, Mr. Pastor, a miner’s son and a former high school teacher, is a member of a not-so-exclusive club: Capitol Hill millionaires. That group has grown in recent years to include nearly half of all members of Congress — 250 in all — and the wealth gap between lawmakers and their constituents appears to be growing quickly, even as Congress debates unemployment benefits, possible cuts in food stamps and a “millionaire’s tax.”

Mr. Pastor buys a Powerball lottery ticket every weekend and says he does not consider himself rich. Indeed, within the halls of Congress, where the median net worth is $913,000 and climbing, he is not. He is a rank-and-file millionaire. But compared with the country at large, where the median net worth is $100,000 and has dropped significantly since 2004, he and most of his fellow lawmakers are true aristocrats.

Largely insulated from the country’s economic downturn since 2008, members of Congress — many of them among the “1 percenters” denounced by Occupy Wall Street protesters — have gotten much richer even as most of the country has become much poorer in the last six years, according to an analysis by The New York Times based on data from the Center for Responsive Politics, a nonprofit research group.

*** How do the insiders get rich? Here’s another story that provides part of the answer. The government gives “foreign aid” to poor countries. And then, it turns the ‘foreign’ aid into military aid…so the money goes into the pockets of Pentagon contractors…their lobbyists…and their pet politicians.

Two Thirds of US Foreign Aid is Really Military Aid
Monday, December 26, 2011
David Wallechinsky, Noel Brinkerhoff

When some Americans complain that foreign aid is wasting taxpayer money abroad that could be put to better use at home, they may not realize that today’s version of foreign aid isn’t what it used to be. Call it the Pentagon-zation of US foreign assistance.

Until a few years ago, the State Department was the leading US government agency when it came to doling out foreign aid. But beginning in the second term of George W. Bush’s presidency, and continuing through the Obama administration, the Department of Defense has surpassed the State Department in supporting foreign initiatives, most of which have been military oriented.

For the past two years, the Pentagon has been given $10 billion more than the State Department for foreign aid projects. With $17 billion, Defense officials plan for the coming year to invest in foreign military and police training, counter-drug assistance, counterterrorism activities and infrastructure projects, among other programs.

Among the expenditures included in the recently passed 2012 National Defense Authorization Act are $1.1 billion to the government of Pakistan for alleged counterinsurgency efforts and $415 million for two programs known euphemistically as the Combatant Commander Initiative Fund and the Commander Emergency Response Fund. Translated into everyday English, this means cash that can be handed out by US commanders.


Bill Bonner
for The Daily Reckoning

The Daily Reckoning