The US and Daddy China

Another week’s ‘progress’ from the US government as it continues its inflation stoking strategies. The most pronounced recent feature was US Secretary of the Treasury Timothy Geithner’s trip to Beijing, to petition China for continued foreign reserves support for the dollar, a difficult – maybe impossible – endeavor.

Using the recent rally as evidence that the US might be showing some signs of stabilizing, Geithner went on a road show, pitching confidence in the American financial system. Will it work? Perhaps for a short while, but as Bill Bonner explains below, the US is going down a road with few opportunities to turn back around…

“Americans are in the habit of spending huge amounts of money…with no intention of ever paying it back. Consumers did it in the ’09s and ’00s. Now the feds are doing it. The federal deficit for this year alone is four times last year’s record. The official US debt is exploding. Bill Gross says it will be 100% of US GDP within 5 years. Our guess is that it will reach that level even sooner.

“At 100% of GDP…even mainstream economists believe the situation will be irreversible…interest payments will be more than the US can afford. At that point, forced to borrow more and more just to keep up with the interest, the system will go into a Ponzi-scheme endgame.

“Our expectation is the government won’t be able to exit” from its deficit spending positions, said Gross in an interview on Bloomberg Radio. The programs ‘will be semi-permanent positions on their balance sheets.’

“Once you go down that road, it’s hard – maybe impossible – to come back. The US won’t be able to pay off its debt…and it won’t be able to unload GM. Nor will the Federal Reserve be able to sell its holding of bonds onto the open market – without causing yields to rise.

“Even Ben Bernanke says that ‘long-term deficits threaten the financial stability’ of the nation.

“As we’ve pointed out many times, the problem is more political than financial. The bums in Washington could still straighten up – if they wanted to. We’ve already told them how they could bring the deficits…and the economic downturn…under control. But they’re not about to take our suggestions. Instead, they’re “gonna have fun, fun, fun until Daddy takes the T-bird away…”

“Daddy China, that is. The Middle Kingdom. The Red Menace. Now, the leader of the bond vigilantes.

“Remember the bond vigilantes? They are supposed to keep a lookout for inflation. And when they see it increasing, they come riding into town guns ablazing…they sell bonds and force up yields, thus bringing inflation back under control.

“Inflation rates and bond yields have generally been going downhill for the last 26 years…so the old vigilantes have retired. But now China seems to be strapping on its six guns.”

If you’re interested in finding out exactly what Bill sees as China’s next moves, you can read the rest of his notes here.

The Daily Reckoning