The Perils of Monetizing US Debt

By: Jes Black | Wed, Jun 20, 2007
Print Email

In our weekly reports, we often take the classical view on money. While we admit that monetarism may fail as an easy policy approach, from a fundamental standpoint, the supply of money will ultimately decide the long term rate of interest.

The classical view holds that interest rates will adjust to the equilibrium level between savings and investment. The prevailing Keynesian view is that interest rates will adjust to the supply and demand for money.

When we speak of money supply, we are talking about money and credit created. But what is conspicuously missing from this classical versus Keynesian view is the effect of interest owed to national debt which is the purely Keynesian phenomenon.

Consider that the current national debt is $8.4 trillion dollars, which amounts to roughly $30,000 for every man, woman and child in the United States. In 2005 there were approximately 113,146,000 households, which means each household's share of the national debt is $74,000.

In 2005, the median annual household income according to the US Census Bureau was determined to be $46,326, or just 62% of the total owed by each family.

While this does not seem daunting, the fact is that because of this ratio current income taxes collected by the IRS pay off only the interest on the debt owed. This is part of the reason that the government continually spends more than it receives - because tax receipts pay only interest owed on the debt.

However, if the US government were to follow GAAP accounting rules the net present value of future unfunded liabilities approaches $50 trillion dollars or $441,906 per household.

Now consider that the average household income is just 10% of each household's share of the net present value of future unfunded liabilities. Therefore, at the rate that debt is increasing, eventually we'll reach a point where even if the government takes every penny of its citizens' income through taxation, it will still not collect enough to keep up with the interest payments.

As we said in our regular weekly report last time, "Googlers, we might call them, by an overwhelming majority have voted for the libertarian minded Paul, to the point that the results are so far skewed from a normal distribution bell curve that organizations like MSNBC, CNN and others have questioned the validity of their own polls."

One of reasons we think netizens are seeking out more information on Ron Paul is that the debt burden is a future problem that will have to be dealt with primarily by Generation Xer's. As a proponent of 'sound' money, Mr. Ron Paul is generating the most interest of any candidate, Republican or Democrat, according to mainstream online polls.

In the financial markets, the main pillar in government backed securities is the ability of the said government to tax citizens or send them to jail. But if debt reaches a point where even taxing every cent made only covers the debt, then any net new borrowing will not be able to be paid for. At this point, the basic supply and demand function of either classical or Keynesian theories will succumb to the reality that the government needs more money and that while there may be willing lenders, the risk premium attached to that lending must be higher.

We have harped on this point for a number of years and is the main pillar of our contention that U.S. interest rates will rise, regardless of a "savings glut" or whatever other moniker they ascribe to this imbalance. As such, we think that long term yields are breaking out and after a needed pullback, the next big move in yields is higher. Much higher.

More investment-specific commentary on Treasury, Commodity, and Currency markets is available at



Jes Black

Author: Jes Black

Jes Black
fx Money Trends

Jes Black, hedge fund manager at Black Flag Capital Partners, specializes in foreign exchange and global macro trends. Prior to organizing the fund he helped MG Financial Group launch In the summer of 2004 Mr. Black formed FX Money Trends, a research firm catering to professional traders.

Mr. Black holds a degree in economics from the University of Kansas and an MBA from the ESC in France. His market commentary is often featured in the Wall Street Journal, Financial Times and Reuters. He has also written numerous strategy pieces for Futures magazine. To find out more about the funds research letter visit Qualified prospective investors can find out more about Black Flag Capital Partners by e-mailing

Under no circumstances does the information contained in this site represent a recommendation to buy, sell or hold any security.

Copyright © 2004-2007 Jes Black

All Images, XHTML Renderings, and Source Code Copyright ©