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Wednesday, September 8, 2010

Treasury Debt Default?

I hear this ridiculous story circulated over and over again. It's "The US government may default on Treasury debt." They are referring to "nominal default" rather than "default via inflation". Default via inflation is guaranteed. A nominal default cannot occur, because new money/bonds can be printed to continually refinance the national debt.

"The Federal government will outright default on the national debt!" is ridiculous. The Federal government can always print more money/bonds to refinance its debt. As long as the slaves use Federal Reserve Notes as money, government can't default on its debt.

Physical Federal Reserve Notes are printed by the Treasury Department. They are sold to the Federal Reserve for the printing cost, and not for the face amount. New Federal Reserve Notes are introduced into circulation when the Federal Reserve sells them to the financial industry for the face amount via "monetizing the debt". This inflation fuels financial industry profits, or purchases the national debt.

When the Federal government has deficit spending, the Treasury issues more Treasury debt. This debt is sold to the financial industry. The financial industry sells about 10% of this debt to the Federal Reserve. Via fractional reserve banking, the financial industry creates the remaining 90% of the money required to purchase the remaining Treasury debt.

The Federal government cannot default on its debt. They can always print new bonds and Federal Reserve Notes to refinance the debt. Most new money is created electronically. New physical Federal Reserve Notes are also introduced for sufficient circulating physical money.

True inflation is 20%-30%, but yield on Treasury debt is only a couple percent. Why do banks buy Treasury debt? The answer is "leverage". Banks borrow at the Fed Funds Rate, currently 0%-0.25%, and buy Treasury debt, yielding 0.5%-4%. When banks speculate in Treasury debt, they use leverage ratios of 100x or more. Suppose the Fed Funds Rate is 0.25% and long term Treasury debt yields 3.25%. That's a profit of 3% * 100x leverage, for a profit of 300%! That's how the banksters make a profit almost every day.

Further, Treasury yields have been crashing as the Federal Reserve keeps the Fed Funds Rate at 0%-0.25%. When the yield of a bond decreases, the price increases. For a 10 year bond, if interest rates fall 1% then the price of the bond goes up approximately 10%. Suppose Treasury prices go up 10%, and the bank has 100x leverage. That's a profit of 1000%!

Via this "illicit interest arbitrage" trade, the banksters make huge profits while the rest of the country is stuck in a severe recession/depression. These profits aren't free. Productive workers pay the cost via inflation. You savings are eroded via inflation.

Via this "illicit interest arbitage" trade, the banksters don't care what real inflation is. They profit from borrowing at the Federal Reserve and lending at higher interest rates. They lend to the government, to corporations, to mortgages, or to individuals. Lending to the government is best, because that's riskless arbitrage.

The Treasury debt default does not happen all at once. It happens gradually via inflation. Suppose that Treasury yield is 3% while true inflation is 30%. Then, Treasury debt default occurs at a rate of approximately 2% per month. It's a gradual default and not an outright default.

The banksters buy Treasury debt due to their ability to use leverage. As an individual, you'd be an idiot to buy Treasury debt. You'll be ripped off by inflation. Foreign central banks, like China, are getting similarly scammed. Their Treasury debt investment is unleveraged.

Suppose the President went on TV and said "I'm cutting everyone's Social Security check by 20%!" There probably would be riots. Via inflation, the net effect is the same.

As long as the slaves are forced/conned into using Federal Reserve Notes as money, there will be no default on the national debt. The Federal government can always print new Treasury bonds to refinance the debt.

The banksters profit via huge leverage, borrowing at the Fed Funds Rate and buying Treasury debt. These profits are pure illicit interest arbitrage, at the expense of productive workers via inflation. That's how the banksters make huge profits while the rest of the economy is stuck in a recession/depression.

The Treasury debt default does not occur all at once. It occurs gradually via inflation. If inflation gets too high and there's hyperinflation, then the State extortion racket falls apart. To avoid subsidizing the State, you should keep your long-term savings in physical gold and silver.

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