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The Perils of Monetizing US Debt

Economics / US Debt Jun 20, 2007 - 06:17 PM GMT

By: Jes_Black


In our weekly reports, we often take the classical view on money. While we admit that monetarism may fail as an easy policy approach, from a fundamental standpoint, the supply of money will ultimately decide the long term rate of interest.

The classical view holds that interest rates will adjust to the equilibrium level between savings and investment. The prevailing Keynesian view is that interest rates will adjust to the supply and demand for money.

When we speak of money supply, we are talking about money and credit created. But what is conspicuously missing from this classical versus Keynesian view is the effect of interest owed to national debt which is the purely Keynesian phenomenon.

Consider that the current national debt is $8.4 trillion dollars, which amounts to roughly $30,000 for every man, woman and child in the United States. In 2005 there were approximately 113,146,000 households, which means each household's share of the national debt is $74,000.

In 2005, the median annual household income according to the US Census Bureau was determined to be $46,326, or just 62% of the total owed by each family.

While this does not seem daunting, the fact is that because of this ratio current income taxes collected by the IRS pay off only the interest on the debt owed. This is part of the reason that the government continually spends more than it receives - because tax receipts pay only interest owed on the debt.

However, if the US government were to follow GAAP accounting rules the net present value of future unfunded liabilities approaches $50 trillion dollars or $441,906 per household.

Now consider that the average household income is just 10% of each household's share of the net present value of future unfunded liabilities. Therefore, at the rate that debt is increasing, eventually we'll reach a point where even if the government takes every penny of its citizens' income through taxation, it will still not collect enough to keep up with the interest payments.

As we said in our regular weekly report last time, "Googlers, we might call them, by an overwhelming majority have voted for the libertarian minded Paul, to the point that the results are so far skewed from a normal distribution bell curve that organizations like MSNBC, CNN and others have questioned the validity of their own polls."

One of reasons we think netizens are seeking out more information on Ron Paul is that the debt burden is a future problem that will have to be dealt with primarily by Generation Xer's. As a proponent of 'sound' money, Mr. Ron Paul is generating the most interest of any candidate, Republican or Democrat, according to mainstream online polls.

In the financial markets, the main pillar in government backed securities is the ability of the said government to tax citizens or send them to jail. But if debt reaches a point where even taxing every cent made only covers the debt, then any net new borrowing will not be able to be paid for. At this point, the basic supply and demand function of either classical or Keynesian theories will succumb to the reality that the government needs more money and that while there may be willing lenders, the risk premium attached to that lending must be higher.

We have harped on this point for a number of years and is the main pillar of our contention that U.S. interest rates will rise, regardless of a "savings glut" or whatever other moniker they ascribe to this imbalance. As such, we think that long term yields are breaking out and after a needed pullback, the next big move in yields is higher. Much higher.

More investment-specific commentary on Treasury, Commodity, and Currency markets is available at .

By Jes Black

© 2007 Jes Black - Jes Black, hedge fund manager at Black Flag Capital Partners, specializes in foreign exchange and global macro trends. Prior to organizing the fund he helped MG Financial Group launch In the summer of 2004 Mr. Black formed FX Money Trends , a research firm catering to professional traders.

Mr. Black holds a degree in economics from the University of Kansas and an MBA from the ESC in France. His market commentary is often featured in the Wall Street Journal, Financial Times and Reuters. He has also written numerous strategy pieces for Futures magazine. To find out more about the funds research letter visit . Qualified prospective investors can find out more about Black Flag Capital Partners by e-mailing

Jes Black Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


20 Jun 07, 23:26
credit makes up what% of money supply

anyone have an idea what percentage of the money supply does "credit" make up?

and how much of an effect will rising intrest rates have on this credit supply and thus the total monetary supply?


21 Jun 07, 18:20
higher interest rates


That's a trick question. One person's money is always another persons debt so the correct answer is 100%.

To answer the second question, who knows. Higher interest rates are supposed to encourage people to take on less debt, slowing the growth of the money supply. It may even encourage people to pay down their debts or even default on them, which would actually reduce the supply of money.

21 Jun 07, 19:22
Monetizing US Debt End Game ?

Mr. Black,

I'm a little fuzzy on the end-game.

My example is Japan. Wave after wave of fiscal stimulus packages has left the Japanese with a public debt of 176% of GDP. The stimulus packages have increased incomes and allows the public to decrease debt levels. In effect, private debt has been transfered to public debt instead of being discharged through bankruptcy courts.

My question is, what happens now?

john from tn,usa
25 Jun 07, 18:46
US $11 Trillion Debt

Actually Americas debt is closer to 11 trillion dollars and much of that, 850 billion is held by china,800 billion to japan etc ,you can get an acurate report at the treasurys web site.

I have been trying to tell everyone , that it is going to be rough when china,japan and all the nations we owe money to, cash out. Hyperinflation will be the result,and really not all nations have to demand payment to cause a huge crisis for the US.

Everything made outside the US WILL BECOME TOO EXPENSIVE TO PURCHASE BY THE EVERYDAY AMERICAN,AND THINGS MADE IN THE US WILL get less expensive,unfortunatly not much is made in the USA anymore.

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