I promised I would write a piece that explains why the “we owe it to ourselves” explanation of our national debt is pure hogwash. The thought process is that since “we owe it to ourselves” who cares how much total debt we have because it just doesn’t matter. If we defaulted, we would only be defaulting on ourselves so no harm no foul. This fallacy can be taken apart from several different angles so let’s explore a few of them.
From one angle, let’s look at this from a balance sheet perspective. If we “owe” something but that “something” is also an asset then they just cancel each other out right? Well yes, sort of but you also must look at this from a “quality” standpoint. If we owe “too much” and the debt becomes unpayable from a practical or mathematical standpoint then just how “good” is the asset (Treasury bond) that we claim on our balance sheet? One must also remember that for the debt markets to actually function correctly they must also be funded by foreigners. What has happened is that we have gone from a fully functional debt market where there was global demand to one where the lender of last resort (the Fed) has become the lender of ONLY resort. This concept of “we owe it to ourselves” was the not the case in the past but new debt paper is no longer being accumulated by foreigners on any scale that would clear the market. Were it not for the Fed’s purchases, Treasury securities would be at only a fraction of current prices and yields would be at record highs.
From another perspective, do we really “owe it to ourselves?” No, we owe China alone over $3 trillion followed by the Japanese and other foreigners. We owe nearly half of our “funded” (on the books) debt to foreigners which is a danger. I say a “danger” because China could very easily on their own turn our debt markets upside down in destruction. They could simply sell a large chunk of their holdings to break prices and jack interest rates up. “But they would never do this,” you say because they would be shooting their own holdings in the foot? Well, yes they would be but…think about the wars of the past. Have you ever heard the saying, “The spoils of war go to the winners?” This had to do with the “winners” securing the “losers” gold hoard. Isn’t this exactly what’s happening right now? Isn’t China importing gold at a rate that would eclipse purported U.S. holdings in less than 5 years start to finish? I have news for you and have said this before; we ARE at war, economic war. We have been at economic war for several years and we are losing miserably. The Chinese will “carry us” in this prizefight until there is no more gold to be had. The “knockout” will come once they are “failed to deliver” upon at which time they won’t care one with what their Treasury holdings are worth. In fact, they probably made the decision many years ago that these holdings were not worth anything of value other than an avenue to bankrupt us and a lever to pull when the time was right. That “time” will be when they are told there is no more gold forthcoming. This is a war that they will win (have won) without even firing a shot.
Switching gears, the Fed has built up a balance sheet over $4 trillion…which we “owe to ourselves” because it is the “Federal” reserve. Sorry to burst your bubble but the “Fed” is a private institution privately owned I believe by 13 families mostly of European background. We “pay interest” to them which in turn partly gets refunded back to the Treasury but that is not the point. Forget about the “dollars,” this arrangement is about the “control.” “Control” of interest rates, control of the money supply, inside information of which way the wind will blow next etc. Mayer Rothschild himself said that he didn’t care who the king was or which party was in power, he only wanted control of the “issuance” of money and from there he could control everything …which is exactly how and why the Federal Reserve was chartered in the first place.
Another angle which is forgotten is that when debt is created the “interest” that must be paid in the future does not yet even exist. The only way that the future interest can ever be paid is if more money is created…and the way our system creates new money is by…issuing more debt. This is the problem, in order to survive, our debt based system must by definition continue to expand (by issuing more debt) because the interest to pay past debt must be created by issuing new debt. The easiest way to explain this is that debt can never be “paid off” because there is not and never can be enough money to pay it off.
I guess from a common sense standpoint, even if we did “owe it to ourselves” and “we” as a nation were (are) bankrupt then what is it actually worth? The question “why does it matter?” is easy to answer. If the debt burden is too high and unsustainable then its (Treasury debt) “price” or value must also be “low” or not worth much. If this is the case then what is considered an “asset” (dollars which are owed) is also of little value. If you believe that the debt “doesn’t matter” then the flip side is that neither do the “dollars” which is why the Chinese are on loading all of the western gold that they can. They understand that gold is no one’s liability and the most “pure” of all monies (assets). All other “monies” (dollars, euros, yen etc.) are liabilities of someone, somewhere…except gold and silver. I will tell you that it absolutely does matter if “we owe it to ourselves,” not so much from the “owing” point of view but what it is exactly that we are “owed” and whether or not is has any value. Dollars “have value” because it is perceived that Treasury securities have value. Whenever the “perception” changes and one or the other is no longer perceived to have value…neither will the other because both dollars themselves and treasuries are tied at the hip. In other words you cannot have one without the other.
On a totally different subject and one of ‘lore, yesterday was Groundhog Day. I have a more trustworthy indicator and one that is sanctioned by Mother Nature herself. Rather than watching some “squirrelly” thing pop in and out of its borough, I think that it’s better to just brush your horse. If while brushing, if some of the “furry” hair comes off then you can bet that warmer weather is just around the corner. Here in south Texas even though it was 77 degrees yesterday, Principe’ is not losing any hair yet at all and still looks like a 1,200 pound “baby chick.” I think that it’s safe to say that we will have “another 6 weeks of winter”…or at least that’s what Mother Nature is forecasting.