The VCo’s People before Profit Commitment: This blog was 100% authored by a human, not an LLM.
The United States Federal Government has been operating a Ponzi for the past 25 years.
Trump wants lower interest rates so the interest on their $40,000,000,000,000.00 debt is lower. Trump wants lower interest rates so badly he is prepared to unlawfully fire Jerome Powell, Chairman of the Fed, or at least make his life a living hell until he resigns.
But lower interest rates mean higher asset prices and heavy inflation. Worse, they invite the government to continue Ponzi-ing, exacerbating a problem that is already at catastrophic levels.
Investors are not buying US Treasuries. The Chinese government, who was until recently the higher holder of US sovereign debt, has been dumping them like they are toxic and on the verge of default.
The last two bond auctions failed – both with uptakes under 17% of the issuance.
Higher interest rates on the other hand mean higher bond yields, which makes them attractive for newer, shorter term Treasury Bills (<1 year term), but kills the demand for longer dated Treasury Notes (2-10 years) and Treasury Bonds (20-30 years). The reason for this is quite simple. The average yields on Notes and Bonds are ~4% and ~4.9% respectively. If you’re holding a bond yielding say 4.5%, and a shiny new Bill comes along for 5%, you’re dumping that Bond in favour of the Bill. They are both backed by the same insolvent government, so you may as well go for the higher yielding one.
But here’s the problem. The majority of the US Sovereign Debt (~60%) is in the longer-dated Treasury Notes, and when investors want to cash them in at maturity (like China), the government has to pay the face value (the principal) in cash. How do they do this when they don’t have the money and continue to trade at eye-watering $2,000,000,000,000 annual deficits? They just borrow more money by issuing more bonds to pay out old debt.
It is precisely for this reason that the US Government and most of the Western World are operating legally sanctioned multi-trillion-dollar Ponzi schemes. The difference is, they aren’t offering Ponzi-like high returns. They can’t even afford the tiny 5% bond yields. Hell, they can’t even afford their own budgets.
Ponzi schemes are only successful while new money flows in. In the case of the United States, the new money has historically flowed in from Japan, China, the Eurozone… and YOU! Yes, you my dear friend. Have a look at your super / investment statements. Where it says Bonds, that’s you lending your hard-earned cash to insolvent governments so they can use your money to pay back the guy that lent them money 10 years ago.
But this is no longer enough.
The debt has gotten so out-of-hand that the inflows are not nearly enough to fund existing obligations, let alone cover the ever-expanding budget deficits.
Houston, we have a real problem here.
Because if the Fed cuts interest rates, inflation will crush the economy (more than it already has).
But if the Fed increases interest rates, the US defaults, the longer-dated bond dumping accelerates, which will spark a global bond sell-off like never before seen, unleashing all kinds of hell on financial markets.
Trump’s big plan?
He wants to leverage from all the hype surrounding cryptos. The so-called Genius Act legally enforces so-called “stablecoins” to be 100% backed by US Dollars, either in the form of cash or Treasuries. Trump believes this will solve the problem because with the illusion of protection from Genius Act “backing”, people will pour their hard-earned cash into crypto exchanges to buy “stablecoins” which will force the exchanges to buy more Treasuries to back them.
This plan is doomed for so many obvious reasons, laying them out makes me feel somewhat condescending – but if I must condescend, I shall.
Firstly, the total market cap of all cryptos currently sits at just under $4 trillion. Now keep in mind that this market cap follows an explosion in speculative pricing over the past couple of years. This includes bitcoin, all the “stablecoins” and all the “altcoins” and “memecoins” etc. “Stablecoins” currently represent around $280 billion. So lets say the entire crypto market decided to move 100% of their crypto holdings ($3.72 trillion) into “stablecoins”. Well, let’s just say $3.72 trillion would be more like $1 billion by the time the market re-priced them following the selldown. But just to humour the plan, let’s pretend that these cryptos will retain 100% of their value and $3.72 trillion dollars’ worth of crypto will make their way into “stablecoins”, and the exchanges would then be forced to buy $3.72 trillion worth of bonds.
This wouldn’t even scratch the surface of the bonds that need to be refinanced.
In the next 12 months, $11 trillion dollars of bonds are coming up to maturity. This so-called “Genius” move only buys a couple of months, and that’s assuming a 100% uptake.
Secondly, do they seriously expect these crypto exchanges to comply? We know for a fact that Tether, the “OG stablecoin” is not backed 100% by US Dollars. The crypto bros are so brazen that instead of actually backing their “stablecoins” they gamble with them, buy superyachts, Lamborghinis, luxury compounds in the Bahamas and mountains of ketamine. It is only by sheer dumb luck that the public, desperate to gamble the way up to the lifestyle that the crypto bros portray, have speculated so heavily into these crypto Ponzi schemes – enabling the musical chairs to continue to date. I truly believe the next “crypto winter” will be when the music stops, forever.
Thirdly, and this relates back to a blog I recently wrote Cloud Fiefdom and the Tokenisation of Everything, you simply cannot solve a fiscal problem buy tokenising it, rebranding it, and shifting it onto something else. Moving your hard-earned money from a nothing-backed dollar to a digital token backed by a nothing-backed Treasury is simply a crafty way for the government to get you to buy bonds when no-one wants to buy bonds.
But it is even worse than this. You’re handing your hard-earned money to people who are even less trustworthy than the bankers themselves.
Trump & Co know that the number 11 is bigger than the number 4, so they must know that that the Genius Act “stablecoin” plan alone won’t fix the problem.
Enter “Gold-backed Treasuries”.
This plan is so cute it is hilarious.
The US Government currently owns about $750 billion worth of gold in today’s market pricing. The idea is to use this gold to pay for bond redemptions, rather than cash. And to buy as much time as possible, the terms are absurdly long – 50 years! So that means you buy a gold-backed Treasury today, and in 50 years the US government pays you back in gold. Genius right!?
While I don’t mind this idea conceptually (I believe demand for gold will long surpass demand for “stablecoins”), this plan is a teardrop in the ocean. Even with a 100% uptake on these “gold-backed Treasuries” you’re looking at about 1 month relief on debt obligations. Then the US will have no money AND no gold… and they’ll still be $40 trillion in debt with a $2 trillion annual deficit.
We can’t ignore the symbolism of these ideas. Yes, Mr Doom-and-Gloom here has only focused on the ridiculousness of the fundamentals and the flawed arithmetic, and I have ignored the stupidity and irrationality of people. The act of simply announcing these measures will make the US Government seem smart and innovative to 99% of the general population. Mum & Pop investors will love the sound of these ideas, and they’ll get behind them, and institutional investors may even jump on the momentum.
But the breaking point will arrive. It has to. You can’t just erase $40 trillion of debt. This debt is owed to people. People who actually worked, traded their time and toil for it. This money is owed to you, me, and the governments of the world. And their only plan is to continue tokenising and devaluing the debt with more fiscal expansion, which is Ponzi-style theft, disguised as innovation.
After they buy 3-6 more months with these plans, what happens next?
Who knows.
Knowing Trump & Co, the next idea will be even more ambitious and big-sounding.
But while they talk up a big game, they cannot change the fact that the cost of living continues to skyrocket, physical and mental health continues to plunge, homelessness and despair are through the roof, once-bustling cities are turning into zombie towns, and living conditions for the middle-class are the worst they’ve been since the Great Depression.
And the Black Swan hasn’t even arrived yet.
Will the next Black Swan be French?