Easy Money

By Bill Wilson


There's something to be said about profiting off of the ill fortunes of others.

In late January, the U.S. Treasury Department warned Congress that the U.S. was fast approaching the statutory limit on the national debt ceiling, then $12.394 trillion. They said, by the end of February, that limit would be reached.



Congress said that if they failed to raise that ceiling, the nation would default. Why? Because, the nation is so far in debt, it had to borrow money just to keep up with paying down its principal, the interest owed on said debt, and financing the $1.556 trillion budget deficit.



Of course, it need not have defaulted. It could have simply cut spending drastically. But instead, they raised the debt ceiling so that the borrowing binge could continue unabated, by $1.9 trillion to $14.294 trillion.



So, how did the debt go from $11.850 trillion in 2009 to its current $12.6 trillion? Debt auctions. In particular, emergency Cash Management Bills that are frequently issued by the Treasury to keep the nation from an ever-looming default. The only way the Treasury can keep up with paying off the principal on the debt is to simply sell more treasuries.



Here's how Answers.com defines a Cash Management Bill: "A short-term security sold by the U.S. Department of the Treasury. The maturity on a CMB can range from a few days to six months. The money raised through these issues is used by the Treasury to meet any temporary shortfalls."



It's akin to the cartoon character that has to run as fast as possible to keep from the ground collapsing right behind him.






Since the beginning of 2009, there have been 46 such emergency auctions, according to an Americans for Limited Government analysis of CMB sales from January 7th, 2009 until April 1st, 2010. That's a lot of shortfalls.



In 2009, with 37 such auctions, that means the Treasury had a shortfall on average every 9.86 days. That's how quickly the national debt is coming due. Less than every ten days — quicker than that really, if one counted all of the other Treasury auctions — more and more principal owed on the debt comes due.



But, no problem, says Congress — for now. As long as the auctions run smoothly, everybody keeps investing, and the people's representatives keep raising the ceiling, taxpayers will never have to pay the debt principal in taxes. Because they couldn't.



The government would basically have to enslave the entire economy for an entire year at 100 percent tax owed to pay the debt. And then we'd have exactly nothing left. Zero.



Why? The national debt is fast approaching 100 percent of the Gross Domestic Product, which was measured at $14.256 trillion for 2009. But, Congress doesn't worry about it now. Investors buy the treasuries, so the people don't have to pay down the principal, they reason. They'll never have to pay. Right?



Here's a startling stat: on December 30th, 2009, the Treasury sold a $5 billion Cash Management Bill at 0 percent interest. That's right, 0 percent interest. What's that mean? Probably, that they were so close to the debt limit, and had principal due, they could not legally pay any more interest.



In other words, the Treasury auctions may be fixed. In the least, investors seemed remarkably willing to take very low yields on the CMB's as the Treasury was approaching its legal borrowing limit. And now that there's no limit, they're happy to take profits once again.



So, what does the chart reveal?



That, as pressure increases on the debt interest rates go up. On December 9th, 2009, after Moody's issued its first warning that the nation's worsening finances would "test the Aaa boundaries," interest rates went up temporarily from 0.07 percent to 0.08 percent, before crashing at the end of the year. On February 3rd, with the second warning, rates jumped from 0 percent to .002 percent, and then up to 0.1 percent at the February 24th auction.



Now, after Moody's third warning that the U.S. is "substantially" closer to being downgraded, interest rates are ticking up on practically a daily basis after crashing while Congress sat on the debt limit. In fact, as the debt limit approached, the interest rates sharply declined.



In fact, now that Congress, on February 4th, raised the debt ceiling for an entire year (they think), interest rates are moving rapidly up. With so much debt owed, this will place increasing pressure on taxpayers.



According to Moody's, annual interest owed needs to stay below 14 percent of revenue, or else the nation could be downgraded from its current Triple-A rating. And, according to the White House Office of Management and Budget's own numbers, that threshold will come as soon as 2014.



Time is running out. But one would not know it to look at the breathless sale of CMB's.



In total, Treasury in 2009 and 2010 has raised $1.3 trillion with CMB's, which pays out $2.954 billion in interest. That may seem small, but that means on average, they sold $28.253 billion at each auction, and paid out on average $64.134 million in interest to the bidders.



At a 35 percent maximum competitive bid, politically-favored institutions called "primary dealers", of which there are currently only 18 who the CMB's are, according to the New York Federal Reserve, "auctioned almost exclusively to" could purchase about $9.891 billion at each auction.



That means an entity at the average 0.2272 percent interest rate would make a whopping $22.472 million at each auction! And if this hypothetical institution participated in all 46 auctions, that entity would at a maximum walk away with about $1.034 billion.



From a Treasury that claims to want to rein in "payday lenders," it sure seems to have permanently indebted the American people to them. Talk about predatory lending. The useless Treasury paper trade is easy money for investors with sufficient funds to invest. And it's contributing to the enslavement of the American people, who are forced to keep making those interest payments as the principal just piles up.



That mountain of debt, if the Treasury ever fails to sell its bills to pay the bills, will instantly come due, and no amount of taxation will be able to pay it back without leaving the American people penniless.



Bill Wilson is the President of Americans for Limited Government.