US Debt Ponzi Scheme

Further to yesterday’s story on US debt hitting $18t, and our earlier explanation of how money is created it is timely to be reminded of the definition of a Ponzi Scheme is (via the SEC):

“is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue.  Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”

Last week the US Treasury released data that showed they had to issue $1.04t since the start of Fiscal year 2015 (8 weeks ago) to raise money to pay off previously issued Treasuries that were maturing together with more deficit spending by the government.  This, by the way, after they recorded record high revenues ($0.34t) for that period which was STILL not enough to cover government spending let alone pay off the old debt.  Seeing a similarity with the above definition here???  And for those that couldn’t believe the cash balance reported at the end of yesterday’s news, that came about in that same period when they drew down on cash by $45b from $126b.

So getting back to the Ponzi – of that $18t total debt, $12.3t is in the form of marketable debt (ala Treasuries etc).  What happens when the market says “no I don’t want to be rolled over, I want my money”?  On that note let us quote US Treasury Secretary Jacob Lew as he addressed the senate on why the US had to raise its debt limit:

“Every week we roll over approximately $100 billion in U.S. bills.  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,”

Tick tock tick tock….