Why We Can Not Purchase Our Way Out Of Debt


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    Howard Liberman Fort Belvoir, Virginia. Soldier using a barbed wire anchor spike August 1942 Last week, there was a discussion in our comments section
    [See the full post at: Why We Can Not Purchase Our Way Out Of Debt]


    Good evening Ilargi,

    I, for one, enjoyed that thread. Speaking for myself, different parts of this whole complex mess become “clear” (if that’s possible) at different times… the whole “energy needed to support this level of complexity” is one I’m still trying to wrap my brain around.

    With regard to the debt, it’s a tough one to even begin to grasp for a lot of reasons, and I’ll name two: (a) the CONSTANT message – brainwashing? – coming from the powers-that-be (and their shills) that everything is good, and (b) the sheer ENORMITY of the numbers. It’s like trying to think in geological time or something… incomprehensible.

    I appreciate you and Nicole and others reaching out to give a mental “hand-up” to me when I’m stuck on aspect that may be clear-as-day to you/them, but a new and/or confusing concept to me. Back in the late 80’s, fresh out of college, I was working for a Fortune 500 company and I remember the plant manager of our flagship plant telling me that government debt didn’t matter… (sure would be interesting to run into HIM today!)

    Thanks for more clarity. The folks you have commenting on your blog are unsurpassed, in my book.


    Probably 90% of Americans have no idea that debt has two sides. The borrower gets the money and that they understand. But then they think the other side is the lender gets the money back as the debt is paid, end of story. That isn’t the end of the story at all. For the lender that loan is an asset on a balance sheet and balance sheets have to balance.

    Or do they? Since most people don’t know that debts are assets on balance sheets they don’t care about balance sheets. If nobody cares about balance sheets then it in theory could make no difference if the balance sheet doesn’t balance. Since mark to market accounting was thrown out the window we are already have put balance sheets behind us. Nobody has to declare bankruptcy if their balance sheet doesn’t balance. The balance sheet is no longer a determinate of bankruptcy. What forces bankruptcy of a bank or financial institution is if they can meet their obligations today. Flood the world with liquidity today and the system continues on today.

    A whole school called Modern Monetary Theory, propounded by liberals especially of the neo variety, banishes the idea of a central bank balance sheet. They propose that central banks simply print money and hand it out. No need to get an asset in return. While the naive followers of this think the money could and would be given to citizens, somehow, we know that won’t happen. It will be given out to the financial sphere. In essence this is what is going on already. The Fed prints and in return takes financial assets, Treasury paper and MBS, but they price they pay is inflated because of, guess what? Their previous purchase of those assets. A virtuous circle is created. They are not officially getting nothing in return, just getting less and less, except it does not look like less on their balance sheet. The one they still keep for appearances and out of tradition or habit I suppose but nobody really cares about that silly old balance sheet anyway.

    Sorry to be so long winded. What I am trying to get at is financial and government debt does not have to collapse under this regime until someone says the emperor has no clothes. The the only ones watching the parade are partners with the emperor. The only reporters at the parade are partners with the emperor. Well there are other reporters but they are not ‘credible’ and are perhaps enemies. What I am trying to say is the US and other favored nations could keep this game going for a very long time. Keeping the financial and government economy running, as the people economy runs down. If nobody can or will say BAC or the Treasury or the Fed is bankrupt, then they aren’t bankrupt, today, as long as they system is liquid.

    I am sure this isn’t clear.


    As bad as the picture painted by your first graph (gross fed. debt) looks, it really only tells about 1/10 of the story. A more accurate picture would be a graph of debt PLUS unfunded liabilities (present worth). I don’t have one, but the consensus seems to be that the current total is now approaching $200 trillion. Even if that figure is $40 trillion too high, at $160 trillion we would still have an order of magnitude more debt than the size of the economy.

    The total of debt plus unfunded liabilities increased by $6.8 trillion last fiscal year (2013), on a GAAP basis, or about 35% of GDP. So you can see that the money supply is increasing in hyperbolic fashion.

    The question continues to be, how will the USA federal govt. make good on its promises? Will they arbitrarily renege on these promises (social security, medicare, VA benefits, etc.) , or will they continue to mail out checks to individuals and hospitals, sparking massive price inflation at the consumer level?

    I believe we will get the answer within a year or so. If a large nation could run deficits of 35% of GDP for sustained periods of time, surely someone would have figured that out a long time ago.

    My guess is that they there will be some sort of crisis within a year, and our masters will inform us that we need to switch to a one world currency or go back to the Dark Ages. I further predict that the fear levels will be so high that everyone will either meekly go along, or be on the rooftops cheer leading the move to a new currency.


    With the “value” of the debt itself denominated in credit instruments, ie; “Federal Reserve Notes,” rather than in money, what other choice does the issuer of said “credit notes” have, but to devalue?

    Re-valuation (deflation) of these “promises to pay” (in what, wampum?) at this point would result in the implosion of the entire Worlds financial systems in one big irreversible Bang.

    Devaluation, on the other hand, kicks it all down the road a little bit farther, buying time, until it all dies with a whimper.

    Maybe that’s why GMO sees it all going down like this, in “Real” terms, not nominal,,,over a longer time span?


    I’m with Mish on this. Periods of high inflation and minimal deflation (or, more like dis-inflation) extending out years, or even decades. Slow, controlled burning of the excesses, until their dollar is no longer accepted.


    I should have added, as well; in the Fed’s eyes, deflation, once started can’t be stopped until universal default is complete. But since the currency involved is theirs, they believe they can control inflation through interest rate and special market operations, and other forms of voodoo.

    But it, too, can develop a life of it’s own, once confidence in it’s creators fails.

    Watch COLA Reform for clues.

    First shot across the bow is the canceling of said COLA’s for retired military.

    Debasement becomes less “efficient” if protections are in place to help the average Prole.

    So, no we can’t purchase our way out of debt, but we can surely inflate our way out,,,for a spell, anyway.


    Why, since the Fed is not owned by the public but by the banks, are toxic assets on the Fed’s balance sheet taxpayer obligations? I should probably know the answer to this by now, but don’t.


    Here’s what Karl Denninger has to say:

    “The Fed will cease QE on schedule. The taper is not only on, it won’t be suspended. And, withdrawing liquidity, that is, allowing short rates to rise, is on the table too, and almost-certainly sooner than you think.

    It doesn’t matter if the market sells off, even if it sells off hard. […]

    So now The Fed comes in and does QE, buying the long end. What happens? Long rates go down. A year on your 1 year to maturity bonds mature, and you must replace them. With what will you replace them? All things being equal, when you replace them you will get less interest income from the new issues.

    So let’s say the effect of QE is that your mortgage goes from 6% to 3%. This is a 50% reduction in your interest payment. But — that MBS gets sold into the market. MBS have a typical maturity profile of about 7 years (which is why the 10 is the benchmark; it’s the closest), fluctuating somewhat. When rates are high and falling the profile is shorter (because people refinance), when rates are low and going higher it extends (because you’re a nut to refinance a 3% loan into a 4% one — nobody does that unless you have to sell and move for some reason.)

    So the guy who buys it gets a 50% reduction in his interest income, but that’s only 1/10th of his portfolio. For the first year, anyway. As such his impact the first year is 5%, then 10%, then 15% and so on.

    We’re roughly five years into this crap now.

    The pension funds and insurance companies that are the backbone of this market are probably doing plenty of screaming, and with good cause. If this keeps up their cash flow will collapse; they can’t absorb it. Further, Bernanke and the rest of the Fed know that factually the damage they took on by buying those instruments during QE cannot be gotten rid of either; it has to roll off, because if you sell that bond you’re going to take a capital loss and crystallize the entire loss right now instead of spreading it out!

    This is what is forcing the end of QE. It is also what is going to force The Fed to pull liquidity and let the short end come up.

    They don’t have a choice but they will never breathe a word of this, because to confirm it would be to give a clean opportunity to gang-bang all those bondholders by Hedge Funds and others who can play in the derivatives market, and that could (read: probably would) set off a crisis far worse than 2008.

    That’s my read on it.

    We’ll see, over the next months, if I’m right.”



    Hi, Ilargi:
    Thanks for all you do. I’ve learned a ton from reading you and other economic bloggers. I Paypal’d you some money to help out with the computer; hope that situation settles out for you.

    Commenting on this column– every time I see something about all the debt it seems to scream to me, “Jubilee!” As in the Biblical jubilee, in which “all debts are forgiven” every 50 years. I’m not sure “all” debts would be practical to forgive, however. Some amount of people’s 401(K)’s are based on debt. I wonder, how much and which debt?

    On the other hand, how much of the insane debt you describe above is notional, existing only on the balance sheet of one of the Five Banks of the Apocalypse* or the Fed? For example, the Fed has possession of a significant amount of Treasuries. The FBotA have most of the derivatives (according to this) Who has possession of the MBS? And so on.

    Suppose a dictator popped out of the woodwork and took over the U.S., and nationalized the FBotA and the Fed. Would it be unreasonable, or destructive, for this hypothetical dictator to say, “OK, we have all these derivatives in our possession– we are now going to make them disappear. We have all these Treasuries in our possession– we will make them disappear too. (Don’t worry, if you are not one of the FBotA or the Fed, we will still honor your Treasuries.) We have all these mortgages in our possession. We will write them down to balances, based on the incomes of the borrowers, that they can pay with a 30-year fixed mortgage. It’s jubilee time– time to kill off some debt!”

    Would this dictatorial debt-slaying spree help or destroy the financial world? What do you think?

    * Chase, Citi, BofA, Wells, and, of course, the Vampire Squid, Goldman Sachs


    Yeah, pipefit, I hear ya. I also wouldn’t rule out the Military “Solution.” That’s usually where these things end.

    Faber said it the other day. Something like,’The Fed, Treasury and Government are one in the same.’
    And I add, they also have an in house Pentagon.


    @Raleigh-Not to be argumentative, but you and Denninger are quite wrong on short rates rising. Perhaps Denninger is not familiar with the work of John Hussman. Hussman has established, through his ‘liquidity preference’ work, that one of the most rock solid mathematical relationships, when it comes to finance, is the one between short rates and base money.

    Hussman says, “we define liquidity preference as the amount of base money that individuals choose to hold per dollar of nominal GDP, given any particular level of short-term interest rates.” I don’t post links, but google ‘john Hussman liquidity preference’

    As with stocks, gold, or anything else, all of it is owned by someone, 100% of the time. When short rates are low (present case), the fed can get away with creating more base money (as a % of nominal GDP). They do this by creating money (reserve notes) and trading that to bankers for Treasury Bonds and mortgage securities.

    When short rates are near zero, people and institutions holding money have little incentive to exchange their money for interest bearing securities. But if short interest rates rise, ” upward pressure on interest rates which reduces the attractiveness of non-interest bearing cash. If the Federal Reserve does not reduce the monetary base sufficiently to move left to the appropriate point on the “demand curve,” the burden of adjustment is instead thrown onto nominal GDP. Since variations in real GDP have a fairly limited range, the majority of that adjustment is forced to take the form of price increases (i.e. inflation) sufficient to bring the ratio of the monetary base to GDP down to the appropriate level.” hussman

    According to Hussman, in order for the fed to raise short term rates even a paltry 25 basis points (without sparking massive price increases) they would have to stop QE entirely AND SELL over a trillion dollars worth of bonds from their portfolio. And that was many months ago. It is probably closer to two trillion dollars worth of junk now they would have sell BEFORE even raising short rates.


    Well as I am the one who noted the “home prices are up 30%” perhaps I should elaborate.

    Believe me, I get the whole debt thing (its the one part of this whole thing I get) – and as long as there is a chance of a 80-90% drop in home prices I WILL NOT BUY – no way no how.

    However, I live in a divided house, with a spouse who simply is running out of patience. It was a major effort to convince her we need to sell, rent, and wait out the crash back in 08, and unfortunately, that (for now) appears to her and all other “nonbelievers” to be the bottom of the market. For years, she trusted me to make the right financial decisions for our family. But after 6 years of being proven wrong, that trust is wearing thin.

    So yeah, while the “up 30%” hurts when you expected prices to drop another 40-50% – the thing that REALLY hurts is the ever increasing rent (now higher than my monthly payment when buying) and my loss of credibility within my family. Buying a house isnt like buying stocks. I didnt want to “make money” on appreciation – all I wanted to do by renting is limit my downside, but this is a decision that looks worse and worse as rent increases.

    So going back to the issue of the debt – while I absolutely believe it is “inevitable” I am beginning to wonder how “imminent” it is. If it hits now then I am vindicated and my marriage is back on solid ground. However, if it doesnt hit until say 2025 or later when my house would have basically been paid off – renting for all those years would have been a major mistake.

    So again, while I personally believe Stoneleigh that we are VERY CLOSE to the cliff’s edge – I simply cannot continue to repeat this in perpetuity and expect my spouse to continue to trust my judgment.

    I hope you understand my dilemma.


    The Fed really can’t exit this thing gracefully.

    Control the official short rates as they might try, well, what is the price of shadow money in China about now? (One of the reasons I can like TAE’s partial (20%?) cash/equivalent holding strategy is, I might be persuaded to loan some at multiple digits farther down the line, with the right collateral) If it doesn’t work out that way, it’s not hard to trade into tangibles.

    The reckoning is going to be in the spread. Short of Tyrannical Executive Order, that Tug-of-War rope between the Fed and the rest of what’s left of the Economy can only stretch so far before it breaks.

    As it stands, the Fed’s mandate here seems to be to print whatever Wall Street, and it’s Congress, spends, plus interest. When this all fails, and Congress points blame at the Fed, to save it’s own ass, the paradigm will shift.

    I’m still confidant my Morgan Dollar will buy me dinner or 3+ gallons of gas when this is all over. As usual.



    Perhaps of interest?


    Disclosure, I still own Real Estate, but would NEVER buy a property to live in, that wouldn’t rent to cover it’s costs plus a return equal to the Corporate Bond rate.

    That way, if times got gnarly, I could rent it out and go live in the woods for a while.

    Best of Luck.


    Cory. Don’t feel too bad. We all make mistakes. The problem is that people brag about their successes and hide their failures, so it feels like you are much worse at finance than most, when you are more likely average.

    That being said, even the most outspoken deflationists that I read made it very clear that they did not advocate the selling of one’s primary residence, IF you could afford the monthly payment, you planned to stay in the area, close to your employment, good school nearby, etc. All the chatter about selling real estate was strictly regarding rental/investment property. Instead, why not take advantage of low rates and refinance down to once in a century low cost capital?

    At this point, the water is muddier than ever. It looks like deflation and hyper inflation are both at arm’s length, or closer, at the same time!!! This is probably by design. The people rigging the system have no reason to tip their collective hand, so why should they. This is why people like gold, since it should do reasonably well in either scenario.

    I have decided to sink most of my capital and time into developing a permaculture project. Everyone’s gotta eat, they say. In the coming collapse, however, I’m wondering how many people will die of starvation. Most folks think food comes from the supermarket. Of course that is and will be true, until the market closes.


    No, no, I don’t think you made a mistake at all. I thought the exact same thing you did back in 2008. Any glance at a Case-Schiller graph made an iron-solid case that housing had peaked and had a long way down to go. Any glance at a Case-Schiller graph today makes an iron-solid case that housing has been manipulated, pumped, and huffed-and-puffed to a fake price “bottom” far higher than the real thing back in the 90’s.

    What it is is, you and millions of other people who believed the market was actually free, have been punked. (Many of these people are savvy investors. Karl Denninger’s one– that’s why he’s so P.O.’d all the time.)

    Furthermore, it appears the PTB are trying to turn us all into a nation of renters. And what the Forbes guy failed to mention in his rosy “renting is good” essay and you did in your post, is that landlords will raise the rent, year after year, as high as the market (not necessarily you) can bear. It used to be that a lot of rentals were owned by Mom-and-Pop, who if they liked you would have mercy on you viz rent increases. Now, more and more rentals are owned en masse by large corporations, who bought them as foreclosures from the banks a couple years ago, and these corporations will squeeze their renters for every penny they can get. See Charles Hugh Smith’s essay.

    We are pointed down the road to becoming a nation of rent-serfs, squeezed to the max for everything we need to live, and never having the margin to save up money at all. There is no middle class in such a scenario.


    Green Grasshopper – and if you do have a house, eventually you will be taxed out of it. It’s not a pretty picture. Moving back towards feudal times.

    As Charles Hugh Smith also likes to say, none of this will stop until the people stop it, but they are loath to stop it because so many are gettng some form of pay check/entitlement/benefit/credit from the government, and they don’t want to upset the status quo lest that gravy train end. They don’t realize it’s going to end, anyway.

    So while TPTB are busy looting, they make sure they keep the money flowing to the masses, just to shut them up. Someone posted a good hierarchy yesterday:

    “The “99%” is just a slogan.

    In reality it is more stratified on a power law with a ratio of .1 to .2

    .001 to .002 represent the true owners of the global system who are descendants of old inherited fortunes.

    .01 to .02 are the figure head puppets that everyone THINKS runs things. This includes politicians, CEOs, etc.

    .1 to .2 are the mangers. This is the most important group and they are the enablers of the oppressive hierarchy. This group largely identifies with the class above them and stands to lose a lot if the system fails. These are the people that need to be changed.

    .8 to .9 are the disenfranchised. This group is owned and considered livestock.

    Until the situation is framed in these terms we will get nowhere. The 10 to 20% enablers are the key and they will fight just as hard as the few above them in the pyramid to keep their position.”


    I think that should say “.1 to .2 are the managers,” not “mangers”. They have a vested interest in seeing the status quo remain the same (top advisors in government, financial advisors, etc.)


    I have heard talk of a re-issue of currency…is that possible? I am sure they are trying think of everything…and before collapse we will see everything and things we never thought possible. There is all this talk that the FED won’t print money and hand it out….but put a gun to their head and I think they will see things differently. Ted


    Astro APRIL looks doubleplus ungood.


    Raleigh said “if you do have a house, eventually you will be taxed out of it.”

    This worries me a lot, as our property taxes are already quite high. Plus there is maintenance that never gets any cheaper.


    I hate to say it but it is almost futile to prepare for an economic collapse. If you really want to move to a farm and do permaculture do it because you enjoy it…not because it will keep you safe….If you have food and everyone is starving around you do you really think you will be able to keep it? If there is the collapse you are talking about there will be no police to protect you…Canada the U.S or else where. It is best to enjoy your time now and love those around you and visit people while you still can. You can prepare for a collapse but without knowing how it all falls out will be like building the Maginot line…Ted

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