The Ponzi Debt

The Daily Treasury Statement that was released Wednesday afternoon as Americans were preparing to celebrate Thanksgiving revealed that the U.S. Treasury has been forced to issue $1,040,965,000,000 in new debt since fiscal 2015 started just eight weeks ago in order to raise the money to pay off Treasury securities that were maturing and to cover new deficit spending by the government.

During those eight weeks, Treasury took in $341,591,000,000 in revenues. That was a record for the period between Oct. 1 and Nov. 25. But that record $341,591,000,000 in revenues was not enough to finance ongoing government spending let alone pay off old debt that matured.

 

The Treasury also drew down its cash balance by $45.057 billion during the period, starting with $126,568,000,000 in cash and ending with $81,511,000,000.

The only way the Treasury could handle the $942,103,000,000 in old debt that matured during the period plus finance the new deficit spending the government engaged in was to roll over the old debt into new debt and issue enough additional new debt to cover the new deficit spending.

This mode of financing the federal government resembles what the Securities and Exchange Commission calls a Ponzi scheme. “A Ponzi scheme,” says the Securities and Exchange Commission, “is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors,” says the Securities and Exchange Commission.

“With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue,” explains the SEC. “Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”

In testimony before the Senate Finance Committee in October 2013, Lew explained why he wanted the Congress to agree to increase the federal debt limit—and why the Treasury has no choice but to constantly issue new debt.

“Every week we roll over approximately $100 billion in U.S. bills,” Lew told the committee. “If U.S. bondholders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance.”

“There is no plan other than raising the debt limit that permits us to meet all of our obligations,” Lew said.

“Let me remind everyone,” Lew said, “principal on the debt is not something we pay out of our cash flow of revenues. Principal on the debt is something that is a function of the markets rolling over.”

The vast amount of debt that the Treasury must roll over in such a short time frame is driven by the fact the Treasury has put most of the debt into short-term “bills” and mid-term “notes”—on which it can pay lower interest rates—rather than into long-term bonds, which demand significantly higher interest rates.

At the end of October, according to the Treasury’s Monthly Statement of the Public Debt, the total debt of the federal government was $17,937,160,000,000.

Of this, $5,080,104,000,000 was what the Treasury calls “intragovernmental” debt, which is money the Treasury has borrowed and spent out of trust funds theoretically set aside for other purposes—such as the Social Security Trust Fund.

The remaining $12,857,056,000,000 was “debt held by the public.” This part of the debt included $517,029,000,000 “nonmarketable” Treasury securities (such as savings bonds) and $12,340,028,000,000 in “marketable” Treasury securities, including bills, notes, bonds and Treasuring Inflation-Protected Securities.

But only $1,547,073,000,000 of the $12,857,056,000,000 in marketable debt was in long-term Treasury bonds that mature in 30 years. These bonds carried an average interest rate of 4.919 percent as of the end of October, according to the Treasury.

The largest share of the marketable debt–$8,192,466,000,000—was in notes that mature in 2,3,5,7 or 10 years, and which have an average interest rate of 1.807 percent as of the end of October.

Another $1,412,388,000,000 of the marketable debt was in Treasury bills, which carry “maturities ranging from a few days to 52 weeks,” says the Treasury. These $1.4 trillion in short-term Treasury bills had an average interest rate of 0.056 percent as of the end of October, according to the Treasury.

The continual rolling over of these short-term, low-interest bills helped drive over the $1-trillion mark the new debt the Treasury had to issue in the first eight weeks of this fiscal year.

The Treasury has taken out what amounts to an adjustable-rate mortgage on our ever-growing national debt.

If the Treasury were forced to convert the $1.4 trillion in short-term bills (on which it now pays an average interest rate of 0.056 percent) into 30-year bonds at the average rate it is now paying on such bonds (4.919 percent) the interest on that $1.4 trillion in debt would increase 88-fold.

But if we don’t spend more we’re going to hurt the poor, crush the middle class , steal candy from babiesand we’re racists! 🙂

Peter:  look up in the sky, what is it?

Paul: It’s $18 Trillion (16 ton weight)

and we’re Wile E. Coyote!

Beep Beep! 🙂

Obsession

Lost Balloonist
A woman in a hot air balloon realized she was lost. She lowered her
altitude and spotted a man in a boat below. She shouted to him,
“Excuse me, can you help me? I promised a friend I would meet him an hour ago, but I don’t know where I am.”

The man consulted his portable GPS and replied, “You’re in a hot air balloon,
approximately 30 feet above ground elevation of 2,346 feet above sea level. You are at 31 degrees, 14.97 minutes north latitude and 100 degrees, 49.09 minutes west longitude.

She rolled her eyes and said, “You must be a Republican.
“I am,” replied the man. “How did you know?”

“Well,” answered the balloonist, “everything you told me is technically correct.
But I have no idea what to do with your information, and I’m still lost.
Frankly, you’ve not been much help to me.”

The man smiled and responded, “You must be an Obama-Democrat.”
“I am,” replied the balloonist. “How did you know?”

“Well,” said the man, “you don’t know where the hell you are — or where the
hell you are going. You’ve risen to where you are, due to a large quantity of
hot air. You made a promise you have no idea how to keep, and you expect me to solve your problem.
You’re in exactly the same position you were in before we met, but somehow, now it’s my fault.” 🙂  — Thanks to one of the readers of this blog for this gem.

P R I C E L E S S !

****************

According to a new study and commentary, the reformed Medicare program under Obama’s Patient Protection and Affordable Care Act <http://www.wnd.com/index.php?fa=PAGE.view&pageId=316121> amounts to little more than a grand Ponzi scheme to benefit seniors, costing young Americans – who voted overwhelmingly for Obama in 2008 – more than $100,000 apiece over and above benefits received in their lifetimes.

John Goodman, president and founder of the National Center for Policy Analysis <http://www.ncpa.org/>, breaks down the numbers in a blog post <http://healthblog.ncpa.org/is-medicare-a-good-deal/> summarizing a study on the effects <http://www.ncpa.org/pdfs/st333.pdf> of the recently passed reform act, often called “Obamacare.”

Goodman explains that even if Medicare avoids the bankruptcy many pundits are predicting, a typical 25-year-old will pay in premiums, payroll taxes and income taxes supporting Medicare an extra $111,000 over and above the cost of benefits he or she would receive from the program. Typical 85-year-olds, however, can expect to receive $55,000 in insurance benefits <http://www.wnd.com/index.php?fa=PAGE.view&pageId=316121> over and above what they pay into the system

“A typical 85-year-old is going to get back $2.69 in benefits for every dollar paid into the system in the form of premiums and taxes – a good deal by any measure.

People turning 65 today don’t do nearly as well – they get back $1.25 for every dollar they pay in.

The average worker under age 50 loses under the system – with a 45-year-old getting back only 95 cents on the dollar.

That’s better than the deal 25-year-olds get, however; they can expect to get back 75 cents for every dollar they contribute.

Gee, no one saw that coming…. 🙂

You might recognize the White House talking points some Democrats have borrowed in the debt ceiling negotiations: taxes need to be raised on “millionaires and billionaires” and “oil companies raking in billions in profits.”

And often that means repealing the Bush-era tax cuts. But is that an obsession?

On Monday’s “The Laura Ingraham Show,” CNBC host Larry Kudlow observed that it might be. However, he warned that his crystal ball is telling the outlook isn’t so good.

“You know, we had a bad release this morning, very bad – consumer spending and incomes,” Kudlow said. “Real consumer spending has actually now fallen for the second straight month. And after taxes and after inflation, what’s called ‘real disposable income’ — is falling. What you got here is another 2-percent quarter coming up. This whole first half looks like 2-percent growth, GDP – which is pretty poor, 4 percent inflation, 9.1 percent unemployment. I mean, it really is a dismal picture and Washington policies are not helping.”

Kudlow explained the answer isn’t higher taxes in a weak economy and even those that tout Keynesian economics would agree with that. But he also said high inflation looms.

“I mean look, do I read this right – the Democrats in all the debt negotiations want to raise taxes in this kind of economy,” Kudlow said. “What am I missing here? I don’t care whether you’re a Keynesian or a supply-sider, or whatever. You don’t want to be raising taxes when the economy is completely sputtering and the inflation rate is picking up by the way, thanks to [Federal Reserve Chairman Ben] Bernanke. So it’s not a good picture.”

The best solution “The Kudlow Report” host said was a plan with spending cuts and changing tax rates. But he reiterated a point he had made on his Saturday radio show, which he question the Democratic Party’s seeming obsession over ending the Bush tax cuts.

“I mean, why not – a nice simple plan, significant spending cuts to deal with the debt problem,” Kudlow said. “And then at the same time, slash the business tax rate to 15 percent, with no deductions and stop all of this rhetoric about ending the Bush tax cuts, particularly for the small business owners and the most successful earners. I have never seen — the Democratic Party has an obsession over the Bush tax cuts. It’s like, whatever the problem is they repeal the tax cuts. It’s like they need a 12-step program to deal with their obsession and anger over the Bush tax cuts. So why not just lower spending, lower taxing coming out of these debt talks? That would provide some confidence and some incentives. That would help.” (DC)

Obsession:  It’s not just for Calvin Klein (now that’s and old reference! 🙂 )

ob·ses·sion:  the domination of one’s thoughts or feelings by a persistent idea, image, desire, etc.

I think I would rather have Brooke Shields jeans… 🙂

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