by David StockMan, David Stockman’s Contra Corner:
Donald Trump says a lot of whacko things, and his recent wild pitches about defaulting on the national debt and replacing Yellen because she is not a Republican sound as if they were coming right out of his wild man wheelhouse. Certainly these statements have gotten mainstream financial journalists and editorial writers in high dudgeon.
Said the NYT editorial page about Trump’s observation that if things got bad enough he’d seek to negotiate “discounts” on Uncle Sam’s towering debt,
Such remarks by a major presidential candidate have no modern precedent. The United States government is able to borrow money at very low interest rates because Treasury securities are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money.
Well, now. These “very low rates” could not have anything to do with the fact that the Fed has vacuumed-up $3.5 trillion of Treasury debt and its close substitute in GSE securities since September 2008. Apparently, the law of supply and demand has been suspended until further notice—-except for the fact that when Bernanke even hinted that the Fed might sell-down some of its grossly bloated balance sheet in April 2013 treasury yields erupted higher in the infamous taper tantrum.
The fact is, ultra low rates on Uncle Sam’s mountainous debt have everything to do with central bank manipulation of interest rates; and “confidence” in Washington’s fiscal rectitude is but an empty platitude.
There has been a central bank Big Fat Thumb on the scales for nearly two decades, and it now includes the $1.7 trillion of treasury debt owned by the People’s Bank of China (including its off-shore accounts), the $1.2 trillion owned by the BOJ and the nearly $7 trillion owned by central banks and their affiliates as a whole.
That’s right. The world’s central banks own more than 50% of the publicly traded US debt of $13.5 trillion, and not one single penny of it was purchased with real savings or anything which remotely resembles honest money. It was all scooped-up when central banks hit the “buy” key on their digital printing presses.
In short, the “very low yield” on US Treasury debt is the product of a giant monetary fraud, not a testament to the strength and safety of Washington’s credit. And it most certainly has nothing whatsoever to do with investor “confidence” in Washington’s integrity.
Just the opposite. The Wall Street traders are all-in on the scam. The marginal bond price is “discovered”, in fact, when fast money traders buy the stuff on 95% repo leverage while front-running the central banks.
So Donald Trump’s wild pitch in this instance can’t hold a candle to the truly scandalous arrangement under which Uncle Sam’s debt is actually priced. Even the treasury debt in commercial bank vaults is mainly there because regulatory authorities permit the fiction that it is risk free and therefore require zero capital backing.
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