Forget about the entitlement and pension shortfalls, the trillion-dollar deficits that still get offset by a Social Security subsidy (moving to SS deficit in 2017), the broken politics of career Senators (clearly the founding fathers would have put limits on Senator terms and filibusters); there's another interesting liability the government faces.
There’s no doubt that agency debt, or debt issued by Fannie Mae
(FNM) and Freddie Mac
(FRE) to provide funding for what’s now 95% of the US mortgage volume, has been explicitly guaranteed by the federal government. Interestingly enough, the savvy Chinese bought tons of agency debt versus Treasuries when the guarantee was implicit. Such bonds paid higher interest though the rates should have been identical to Treasuries. Smart trade. Well, the government backed ‘em, China made sure of that. (See also Is US-China Relationship a National Security Issue?
If you add $6 trillion-plus of agency debt that’s federally guaranteed at this point to round-about $13 trillion in government debt, you get 19 Big Boys. Currently, agency debt isn’t added to the official government debt. When we say the US debt is 90% of GDP and take comfort in that -- as Greece and Dubai get caught up in their own liquidity crises -- perhaps we should look deeper. Sure, the agency debt is backed up
with collateral -- namely the value of many, many houses. But what’s that value today? Consider that Fannie and Freddie volume truly spiked after 2005 when Reps like Barney Frank instituted laws like the Community Reinvestment Act. (Interestingly, he’s now calling for their abolishment. Irresponsible, he says!)
So much has been swept under the table. There’s so much strange accounting. Derivatives (sure, many offset one another), pensions, the difference between agency liability and assets now explicitly backed by the Federal government, the outstanding debt. This is the long-term catalyst for gold. The imbalances, in the end, are a Ponzi scheme, and all Ponzi schemes eventually crack when minimum payments cannot be made.
In the spirit of Todd Harrison. Some questions:
- How does a broken political system find the right solutions to the toughest choices this nation has faced in as long as I’ve been alive?
- Did the Fed’s emergency discount rate cut seem like anything more than a fancy way of jawboning?
- If fractional reserve banking requires constant growth, what happens when credit continues to contract indefinitely?
- Is it not true that imitation is a form of flattery?
- If the Chinese knocked down, and rebuilt, the Bridge of Strength -- a bridge that was one of the few structures to survive an earthquake -- why are so many investors so confident that Chinese stimulus was anything more than an unemployment claim? Except that you had to physically labor, instead of merely file, for it!
- Considering the last question, though unproductive for a nation, it’s a pretty good way of weeding out those who need and those who abuse welfare, isn’t it?
- Is it me, or has there been a legendary, great band formed in the last 15 years?
- If markets are bigger than us, and are always trying to fool us, then who is the fool?
- Is it morally wrong to intentionally walk away from an affordable mortgage because your home equity is well below the home’s value? Technically, you’re giving the bank back its collateral. But I don’t know. Does intention factor into the entire notion of lending?
- Why would I feel bad for a bank that had loose underwriting standards and waived the obvious necessity to have homeowners have an initial equity stake in an asset?
- Chicken, Fish, Steak, Lamb, Beans, is there anything else?
- Why does Obama hate natural gas?
- How long is too long? I can answer this one…I’ll end here.
There’s the average day of John Cassimatis. I try to add things up and for a while I was getting the empty set -- you remember Junior High math? And now I’m getting problem, problem, problem
. When will the piper strike? I guess when the world runs out of money. We’ll start small with Greece and Dubai, and we’ll see how things go. This is the bull case for gold. And it’s not changing anytime soon.
Position in gold.
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