LSD economics

 

Non-Borrowed reserves of US depository institutions (1950 – 02/2008) – Source Federal reserve of Saint Louis

No you’re not hallucinating.

Three years ago I was asked to put the national debt in simple terms.  Finally, here’s what you need to know in less than one single-spaced page (bear in mind, this is radically simplified)…  

The US is borrowing roughly three billion dollars a day to fight a war.  

The chart above is from the Federal Reserve, illustrating that US unborrowed reserves are gone.  This is witnessed by a chart The US has nearly ten trillion dollars in debt (see debt clock http://brillig.com/debt_clock/ – $ 9,457,630,029,443).

One might wonder how that happened.  

One might start by asking:  when I borrow money I go to the bank… but how does a nation like the US borrow money?  When the US borrows money it issues Treasury Notes of various kinds.  A Treasury/T-Note is essentially an IOU from the US government to whoever buys it.  These are purchased by other nations: China in particular but also Japan, Russia and Saudi Arabia among others.  

People get confused, thinking T-notes relate to the gold in Fort Knox, but they do not.  Nixon took the US off the gold standard in 1971.  The dollar (and all debt obligations such as a T-note) is backed by trust and nothing more – trust in the US government to meet its debts and obligations.  The US dollar is what is called a fiat currency.  

The national debt gets recycled.  Treasury notes yield little interest (they don’t even keep up with inflation anymore), so China and others buy T-Notes at auctions, then exchange them on Wall Street for whatever yields higher interest.  

Don’t let this word scare you away:  securities.  It may sound exotic, but – greatly simplified – all it means is huge bundles of debts sold en masse.  They might be mortgages, car loans, student loans, whatever.  Securities are frequently what foreign buyers trade for treasury notes.  The riskier the loan, the higher the interest and the greater the market appetite, in general.

The Think Method of Accounting (Remember The Music Man?)

You would think after running up nearly ten trillion of debt that other nations would start to doubt if the US could pay them back, and indeed now they are worried.  Without making this complicated, that is why the dollar is losing value.  Fewer foreign buyers want T-notes or anything else denominated in dollars.  

The other side of that coin “the cost of war” is the mortgage and lending crisis (the “subprime crisis”).   Lenders receive usurious interest rates for risky loans.  Then hundreds of thousands, millions of these high-interest bearing risky loans are bundled into securities.  High-interest-yield is the juicy stuff of Wall Street.

This allows the mortgage market and all other public debt of the US people to function as collateral for the government to borrow for the war.  

Don’t suppose that the mortgage lending industry was deregulated by accident.  Giving loans to risky parties was quite deliberate by the powers that be to create high interest-bearing substitutes for buyers of Treasury notes.

Putting the public debt up for grabs to foreign nations is treachery.  This is how the “subprime crisis” happened.  Such is the cost of war.

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    • Robyn on April 5, 2008 at 1:45 am
  1. …I’ve posted the history of the deregulation of the mortgage industry here.  And it certainly wasn’t by accident, although also sans any grand political design.

  2. …the reason the dollar is falling and the demand for T-Bills is dropping isn’t due to lack of faith that the US will pay them, but due to sheer proliferation and market saturation.

    If there are more dollars in circulation, they are worth less.  And if the market has many people with large dollar holdings, fewer will want to buy them and more people will want to sell them.  So, the price falls.

  3. toilet paper at some point in the near future

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