Rick Santelli of CNBC went on a bit of a rant the other day and bashed the “debt is wealth” mentality. Zero Hedge posted the video and commented here. While I agree with Mr. Santelli for the most part, I think he is forgetting one small little tidbit.
He said and I quote, “If we continue as a country to fuel our consumerism with debt, there is no way the bond market is going to be wrong.” What he is saying here is that if we keep living on debt to consume, the pyramid will collapse as debt cannot be paid back. In essence he is 99.9% correct, no economy can live forever on the use of debt as it will eventually hit “debt saturation” where either no more debt can be borrowed or where borrowers decide enough is enough. Either way, credit contracts and “consuming” slows and then reverses.
I did not say “100%” correct because he is forgetting one thing, our government and banking systems are also part of this debt game and the underlying currency is not real. When all is said and done, the world will see that the dollar has been a “hologram” since Aug. 1971 when it became totally fiat. “Fiat” as you know means that the currency is based on “faith.” In the case of the U.S., we have the saying “backed by the full faith and credit of the Treasury”…and here is the problem and why Rick Santelli does not receive a perfect 10 score in my book.
Once the credit structure starts to come down, the Treasury will not be immune. In fact, the credit structure has already weakened which is why the Fed has had to purchase such a majority of Treasury bonds. Another aspect is that once credit does reverse, so will tax receipts. I know that most people don’t even look under the hood in the Treasury market but lower receipts means that “interest coverage” or the ability to pay the interest shrinks. The bond market is forecasting a weak economy; I agree that this is correct. But, I believe the day will come where the Treasury market gaps downward in price and upward in yield because of the “bankrupt” nature of the Treasury.
My point is this, bonds are very strong and yields still very low which are issued by a deadbeat Treasury that must rely on the central bank to purchase their bonds. This in my opinion is where the bond market is making a mistake. The prices are being bid up even though the issuer has questionable means to pay and the currency that is promised is freely printed and has exactly ZERO real value.
On a happier note, I have attached Kathy’s latest portrait of our pregnant daughter in law Amanda at the bottom of the page. She gave birth to baby Braydon a couple of months ago. I am always amazed at how these go from a blank slate to the finished product. Kathy is now beginning a portrait of an 85 year old Spanish woman in a traditional dress. This should really test her skill as the goal is to do it almost exact with every wrinkle, blemish and clothing detail on an 18×24 board. You will notice that Kathy took “artist’s prerogative” in this one. She altered the pattern and the color slightly of the shirt so that it didn’t take away from the subject, this next portrait she won’t have that option. If you have the ability to blow up and enlarge the painting, please look at the detail in her hands.
Have a Happy 4th of July and please take a few moments to think about what the holiday is really about because we “were” slowly losing it. It is going away quickly now and the life and liberty that we have enjoyed throughout our lifetimes will only be a memory.