Central Planning, Lying Career Politicians, and the US Ponzi Debt Scheme
Politics / US Debt Oct 14, 2013 - 08:10 PM GMTBy: Graham_Summers
The political class in Washington has failed to reach a deal. They are effectively playing a game of chicken with the markets to see who blinks first. As usual, there are plenty of lies and spin swirling around this situation.
The US Treasury has stated it will run out of cash on October 17.
This in of itself is a strange claim as technically we hit the debt limit back in May and have been resorting to “extraordinary” measures since then. I don’t recall anyone in at the Treasury talking about the importance of the “debt ceiling” then, do you?
Secondly, the Government has effectively been running a Ponzi scheme with our debt for the greater part of 20 years. Over $5.7 trillion of our debt is owned by the Federal Government, ($2.1 trillion is owned by the Fed, $2.6 trillion is owned by Social Security, and over $1 trillion is owned by various Federal Retirement entities).
Indeed, the single largest owner of US debt is not in fact China, but our own Government. We’ve been running this kind of scheme for over 20 years.
Now this is not to say that a debt ceiling breach or a possible default on some payments are NOT huge issues. What I am saying is that the US Government can shuffle money around just as it has for the last 20 years to insure that we meet our debt obligations.
So the debt ceiling “we’re going to run out of money and the world ends” talk is not accurate. What is accurate is that playing games with your debt limits impacts other investors’ psychologies. And THAT is the real issue here.
The Fed has already screwed this up royally. Indeed, by engaging in QE, the Fed alters the very structure of risk in the financial system. Traders on Wall Street, knowing full well that the Fed would be soaking up Treasuries, rushed into new debt issuance with the intention of flipping over these assets to the Fed in the near future.
This became a self-fulfilling prophecy as the “front-running the Fed” trade became a dominant theme for Wall Street. By piling into bonds, traders forced prices higher and yields lower: precisely what the Fed wanted.
It is critical to note that a significant percentage of these investors had no interest in actually owning US debt as an asset class in the long run. They were simply looking for an easy trade that made money. As a result, interest rates were driven even lower by the “investment herd”.
We saw this when Treasuries dived soon after the Fed hinted at “tapering” QE. At that time, traders realized the “front-run” the Fed trade may be ending and dumped Treasuries. Rates rose, mortgage rates rose, mortgage applications collapsed, and the slew of other problems surfaced.
My point with all of this is that Central planning is always a disaster. We are now watching another Central-Planning debacle in the form of the debt ceiling fiasco. These folks got us into this mess, expecting them to get us out of it is foolish.
With that in mind, I’ve already urged my Private Wealth Advisory clients to start prepping. We’ve opened six targeted trades to profit from the US’s debt crisis.
Graham Summers
Chief Market Strategist
Good Investing!
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Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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