I’m glad I have a pretty good sense of humor; otherwise all the pontification and debate about raising or not raising the debt ceiling might bring me to either to tears or a state psychosis. The truth being that all the rhetoric and finger pointing is nothing more than a grand illusion, a distraction to provide a naïve public with the boogey man of their particular partisan choice. In the end, the result of either raising or not raising the debt ceiling will be one and the same; the bankers will get the gold and the taxpayers will get the shaft.
If the present state of political deadlock stays in place and there is no “grand agreement,” the value of US debt paper would fall precipitously and the interest rates due will rise inversely. The holders of all this paper (with the exception of the FED of course) would then be between the proverbial rock and a hard place. Should they start to unload their holdings and get whatever cash out of it they can, or hold on and hope that US will somehow figure out a way to make the higher interest payments?
Any decision to sell would require they be both being willing to take and absorb a substantial loss of principle and finding a buyer willing to except the counter party risk in exchange for the potential higher interest draw. Holding on encounters the risks of both potential non-payment of interest, having their asset values fall and their own credit ratings placed in jeopardy.
So just who would be these buyers of last resort, and whom will they end up sticking with the bill in the end? Well that’s not exactly hard to figure out. Our dear friends, the Primary Dealers of the Federal Reserve System are presently sitting on massive “excess reserves” parked in their accounts at the FED. They will use these reserves as collateral to borrow even more created from thin air “magic money” at ¼% from the FED that they will then use to buy these foreign, mutual fund and hedge fund held Treasury bonds at discount prices. They will then turn around and sell these bonds back to the FED for 3% to 4% more than they paid for them. They can then “pay back” the “magic money” loans and deposit these newly created “profits” back into their FED “excess reserve” accounts. They then payout those fat bonuses they have all come to expect and actually think they’ve earned and then shuffle off their pocket change into campaign funds of their favorite corrupt politicians.
If you had doubts about what all the talk of “possible” further quantitative easing (QE3) was about, well there’s your answer. In the end the US taxpayer will get stuck with the bill for the higher interest payments and the bankers’ particular tax bill of choice: Inflation.
Added into this monumental and ongoing pillaging by Wall Street we will get the political chaos of the President then being responsible for deciding what gets cut and how much, to account for the Congress no longer being able to borrow the 40 cents on the dollar that they are now spending. If you think Congress is a bunch bickering, dysfunctional children now, just wait until that mess gets into the appropriation process.
So what then if there is some kind of “agreement” and the debt ceiling gets increased, coupled with spending cuts and/or increased taxes? Well Congress now has an additional $2.6 Trillion to spend on whatever new or old useless programs they can dream up. Whatever cuts in spending do go into place will result in layoffs of government employees and those of various federal contractors as well as their vendors. The politicians will call it “shared sacrifice,” I’d call it trickle down tyranny. Unemployment goes up and federal and state unemployment insurance payments go up. Home foreclosures go up and the housing markets sags even deeper. Welfare and assistance rolls then grow and in the end this little austerity play becomes a zero sum game in terms of Government expenditures.
This $2.6 Trillion that will now be available for spending will have to come from somewhere. Once again our old friend QE3 will rear its ugly head. New verse, same as the last verse. The Treasury Department puts more bonds up for auction; the Primary Dealers once again borrow from the FED at next to nothing and buy the bonds. As is standard procedure under the POMO process they even receive a fee from the Treasury Department for making the purchase. They then turn around and sell these Treasuries back to the FED at a premium over their purchase price. The “magic money” loans get repaid and more “excess reserves” get parked back in their FED accounts. The obscene bonuses get paid out and the politicians get their bribes. Only difference is this time there are fewer indirect bidders, as foreign nations, mutual funds and hedge funds will be much less inclined to bid at the auction. So then the prices will be lower and the interest rates will be higher. The direct bidders, the Primary Dealers, will then take on an even larger percentage of the auction offer and will subsequently make even more money under QE3 than they did under QE2.
Those Primary Dealers that are US branches of European banks will then transfer these newly created profits to their domestic accounts and use them to finance the ongoing bailout of the Euro PIIGS. Once again the US taxpayer will be stuck with the bill for rescuing Europe’s socialist nightmare, the burgeoning interest payments on another $2.6 Trillion in debt and the bankers’ favorite tax; Inflation.
Unless and until people wake up to this tyrannical fraud and realize that there is nothing in our Constitution or any statute of law that says our currency must be a debt instrument issued by a private bank, this game will go on and on until the whole world collapses into a hyper-inflation that will make Weimar Germany look like a tea party. At which point the powers that be will cook up a war that will spin out of control faster than Courtney Love on a crack binge.