The Biggest Bubble of Them All—Right Before Our Eyes

 

There’s an organization that’s been around for about 235 years. It’s more like a business today, taking in money and paying its bills.

After World War II, this business really got into high gear. It started exporting its goods all over the world. It actually lent money to its trading partners. Business was booming.

But then something happened. The business got too big. Too many managers were hired with their own agenda. The business started paying its people too much. Its trading partners caught on quickly, as they saw the big business getting bloated, and the trading partners started making their own goods.

The partners simply copied the manufacturing practices of the big business. And since the smaller trading partners had access to much cheaper labor costs, the small trading partners have become big suppliers over the past 20 years.

The big business went from being a company that lent money to its trading partners (customers) to a business that needed to borrow money from its suppliers in order to stay a float.

In regular business, it doesn’t matter if you have been around for 235 years. You go to a bank because you need money and, unless you meet the bank covenants, you will not be able to get a loan. This means that, unless you make money, you are out of business.

The big business I’ve described above is called the United States of America. It’s bankrupt. Its staff members, called politicians, spend more money than they take in. But, unlike a real business, the United States has a line of people (investors, domestic and foreign) who want to lend money to it.

And this is where this storyteller gets stuck. Why are people lining up to buy U.S. government debt? Would you invest your money in a 10-year bond that yields 2.2% per year (less than inflation) issued by an entity that has the world’s single biggest debt burden?

There’s an obvious answer. People are flocking to U.S. Treasuries because they see security in them compared to other government-issued debt. But, on the contrary, I see other governments implementing austerity measures to balance their budgets in two to three years. I fail to see this with the United States.

In this day and age, nothing is guaranteed. No, the U.S. will not file for bankruptcy or default on its debt. But it will pump the system with more U.S. dollars in a desperate effort to increase inflation—making the debt that investors and foreigners have bought worth less and less as time goes by.

Bill Gross, head of PIMCO, and the world’s biggest bond fund, was right when he said earlier this year that…

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