Debt Spiral, Treasury Market Stress, and a New Financial Order
International Man: In your view, what role does the Treasury market play in global finance, and how significant is it to the current financial system?
Doug Casey: It’s only important because it exists—but it shouldn’t exist. People think that the Treasury market is part of the cosmic firmament, but there once was a time when the US government had little or no debt outstanding, and the world got by fine without it.
It’s not a question of how significant it is so much as when the time bomb that it represents will go off. That’s because it’s not supported by any underlying assets. Nor is the dollar that it’s denominated in.
Let me use a simple analogy. It’s much as if a king is taxing a farmer. But one year, the king is in a war and needs extra taxes. So he tells the farmer, “Look, I need your seed corn this year to fight the war, but I’ll give you a bond which guarantees that you’ll get it back next year, when you need it. Plus interest.”
The patriotic farmer says, “Okay.” The farmer gets the bond, and the king gets the seed corn. Both are happy until the next year, when the farmer wants to cash in the bond to retrieve his seed corn. Where did it go? It’s been consumed. Now there’s no seed corn, there’s no harvest, and they both starve to death.
That’s the eventual fate of the US debt market.
The financial markets would be much more stable without the government bond market. Government debt doesn’t finance new production, it finances consumption. Either by consuming past production, or mortgaging future production. We’d be much more prosperous, and safer, if it didn’t exist.
Around $2.7 trillion of US debt is held by Social Security. At some point, the people hoping to collect Social Security will come to recognize that it’s not a piggy bank or lockbox, as they used to say. The asset they’re counting on for retirement is the debt of a bankrupt Ponzi scheme. Very much like the bond guaranteeing the farmer’s seed corn.
International Man: In your opinion, what does the 10-year US Treasury yield tell us, and why is it considered one of the most important financial indicators?
Doug Casey: Perhaps it’s because around 20% to 25% of the Treasury market is denominated in 10-year notes. Or perhaps it’s because most mortgages are paid off in 10 years, not 30 years, as people trade houses. If the US chose to it could probably sell a 100-year bond. But it won’t, because that would be an extremely volatile piece of paper, which could shake the public’s faith in the system.
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LewRockwell.com is a libertarian website that publishes articles, essays, and blog posts advocating for minimal government, free markets, and individual liberty. The site was founded by Lew Rockwell, an American libertarian political commentator, activist, and former congressional staffer. The website often features content that is critical of mainstream politics, state intervention, and foreign policy, among other topics. It is a platform frequently used to disseminate Austrian economics, a school of economic thought that is popular among some libertarians.
