Guest Post: Subprime Government And The Liquidity Trap, Parts I and II

Tyler Durden's picture

Submitted by nopat

Subprime Government and the Liquidity Trap

Part I

Intragovernmental debt holdings have been one of the more underreported topics during the last few economic cycles.  This isn’t surprising.  We’ve
turned the federal debt argument into a legal, rather than financial or
moral, debate where the fairness doctrine of universal applicability
means any inconsistency of logic on the part renders the whole invalid.  The
result of this is the public grossly misunderstands the burden of proof
to be the lack of controvertible evidence, and with it any hope of
meaningful discourse is lost in the chicanes of grandiose political
gestures.  Arguments get boiled down into easy-to-swallow pills ready for mass consumption.  We
rally against illegal immigration without questioning who built our
houses, and condemn illegal drug use while washing down an oxycodone
with a highball of scotch.  National debt is now far too high and government spending and waste far too pervasive.  We must stop at nothing to rid ourselves of this indentured servitude.
Oh, dear Faust, if it were only that easy.
all political debates, the rub isn’t the national debt as a whole, it’s
the composition of the national debt between publicly-held and held by
agencies.  To be fair, publicly-held debt is the larger amount – $9.4T of the $14T, or two-thirds.  But
focusing on the public portion of the national debt means the federal
government can still dip its fingers in the other third of the pie that
is the intragovernmental debt holdings without invalidating the “debt =
the devil” position voters love casting, like a pair of bunched-up
panties at a Tom Jones concert, their ballots towards.  Clinton’s
sepia’d legacy will be defined by the moment he paid down the national
debt, if by “paid down” you mean “increased” $588B between 1996-2001 by
raiding the Federal Trust Fund.
The whole
thing works just like any institution sitting on a ton of cash: due to
the timing between assets and liabilities (receiving money and paying
expenses), it makes perfect financial sense to put that cash to work
provided there’s an asset class with low enough risk so as not to
disrupt operations.  And there’s no single riskless asset class like US Federal Debt, backed by the full faith and credit of the US Government.
One of the reforms Lyndon Johnson ushered in with his Great Society was the creation of the General Trust Fund.  The government isn’t “The Government”, it’s a collection of agencies waging a pitched battle for precious taxpayer resources.  Now,
on the rare occasion that spending is less than projected, or as is
more likely, tax receipts earmarked for a specific agency came in above
what was budgeted, this “surplus” is pooled into a general trust and
lent out to other agencies at a rate assumed similar to a government
market issue maturing and/or callable after 4 years.  In
other words, a medium-term to long-term Treasury note with terms set
accordingly including interest paid back to the issuing agency. 
In a manner of speaking, it was a way to become “half-pregnant”.  For
agencies like the SSA collecting 40 or 50 years of taxes from an
individual before a withdrawal would be seen, this represents a massive
source of funding for government operations.  Without
having to access the capital markets, interest rates would remain lower
than they ordinarily would and the drag on the economy would be
reduced.  More importantly, it allowed politicians to expand the size of government without having to increase the direct tax burden.  For
the generation of guns-and-butter baby boomers who were raised during
the unrivaled prosperity of post-WWII America, capitalism was now like
being an organ donor, something at the bottom of a form you could opt
into.  It became as much of an inalienable
Constitutional right as free speech, turkey at Thanksgiving, and the
best education American tax dollars can buy.
Now, this is where the story takes a bit of a turn.  The dollar is the de facto reserve currency, and has been since Bretton Woods.  When
emerging economy wants to access the capital markets, investors
demand the transaction to occur in dollars to ensure sufficient
liquidity – that, in the event things fall apart quickly, there will be
sufficient physical currency to be able to exit their positions.  The same applies for commodities, precious metals, and a whole host of other asset classes.  This
influx of capital increases pressure on the currency markets to the
effect of driving down the dollar (where capital is leaving) and
increasing the value of the foreign currency (where capital is
entering).  To keep their goods cheaper for
export, foreign central banks intervene by using their new influx of US
dollars to buy assets priced in US dollars, causing dollars to increase
in value relative to their currency.  Given the
need to quickly enter and exit these positions in response to changes in
the market, the preference is for the next most liquid asset other than
dollars – US Treasuries.
That’s the inside joke when we get into a pissing match over trade.  A country wants to keep its currency cheap, so it makes our currency more expensive.  The more expensive our currency, the cheaper it is for us to borrow.  Borrowing devalues the currency, and the cycle continues, for as long as there is a buyer, dollars will be printed.  Without a buyer, the currency becomes cheaper, borrowing costs increase, and inflation grips the economy.  That’s
the trade – we get their goods plus rock-bottom financing.  The economy
expands, unemployment drops to the floor, and tax receipts grow.  Trust
funds burst at the seams, the cost of borrowing from now lower than
ever, allowing the unthinkably easy out of cutting taxes and expanding
entitlement services.  In return, they get our inflation.  All gain, no pain.  To
a guns-and-butter baby boomer, it’d be inconceivable any other way. 
Any less, and the inequity of fairness would be worthy of protest.

Part II

Well, at least that’s the way it’s supposed to work.  Except when it works too well, then it doesn’t work at all.  And for the past 40 years, it’s been working exceedingly well.  Which is to say, it’s about to fail miserably.

The interesting thing about the post-war baby boom and our guns-and-butter generation isn’t what happened during or as a result of this population tidal wave, but what didn’t happen:  the birth rate in America abruptly fell during the mid-60s, and continued to fall even through to today.  Compounding the problem, on one hand you have increasing life expectancies and the expansion of benefits placing financial burdens on the retirement system.  On the other hand, increasingly competitive labor markets and trade liberalization placed further importance on education and technological adoption, which both increased the displacement of workers as the domestic value chain moved upstream and delayed the entry of individuals into the labor pool well into their 20s as they traded off starting a family for attaining college educations.  These lengthened dependant obligations (from both ends of the curve) have necessitated longer workforce tenures, and are simultaneously acting as an artificial floor to wages for those already at the peak of their earnings trajectory while creating a ceiling as the next generation is kept in an advancement holding pattern, denied the skills and experience needed to achieve their own maximum earnings potential.  The divide between rich and poor is as much a generational problem as it is access to education, technology, and capital resources.


The other interesting thing about the post-war baby boom was the impact on the savings rate.  The rising percentage of income coming from transfer payments (i.e. entitlement programs) as a result of displacement on one end of the economic spectrum coupled with multiple streams of household income and smaller family sizes on the other drove an insatiable consumer demand that depressed the household savings rate, increased demand for foreign goods, and lowered borrowing costs as a vicious cycle was created.  Attempts at intervening in the markets to protect trade and standards of living did little more than fuel government spending as the domestic value chain moved even higher, displacing more workers and shifting the demand for low-wage labor overseas.


Unless you’ve been living under a rock for the past 3 years…it should be pretty obvious this plan hinges on consumer spending.  Now, consumer spending can come from one of three areas: wages, investments, and borrowing.  Well, wages haven’t moved a whole lot over the past decade, and for that matter neither have investments.  Which leaves borrowing.  Lots of borrowing.  Where possible, from ourselves.  Free money, after all, is free money.

Except when it isn’t.  Part of accessing the General Trust means having to pay interest, which the SSA has been more than willing to accept and the rest of the federal government has been more than willing to pay.  For the past 20 years, each time it accesses these funds, it does so at lower and lower costs, with ever more funds to access as tax revenues have continued to grow.  With borrowing costs lower than at any point in history, this should be a no brainer.

If only it were that easy.

The government at large faces an epic dilemma of where to come up with the cash to keep itself moving forward without drawing too much of a shock to the system.  Nearly 1 in 5 is employed in the Public sector, likely more once you take into consideration all the private industries that live specifically off of government contracts.  Almost $0.30 of every $1 of gross earnings is a government paycheck of some form.  Taking into account that social security benefits paid by your employer isn't income, given it goes directly into someone else's pocket, the picture only gets worse.  Public sentiment is clamoring for a reduction in the federal deficit without an increase in the per-capita level of taxes.  Current spending levels are predicated on cheap and easy access to capital markets, which have left the central bank in the precarious situation of being unable to increase interest rates without increasing the overall costs to government, which can't reduce its size without contributing to a greater economic downturn.  As it stands, the SSA can hope to bring in $114B of interest revenue on the debt currently outstanding, less than what it did in 2010.   Unfortunately, there isn’t any capital left in those funds to roll the interest rates over, and unless there’s a miraculous recovery in the labor market (maybe Bill Hicks’ idea of using the elderly for stunt doubles will come to fruition, at least one can hope), payments will continue to outstrip receipts and a draw-down on $2.6T of the SSA trust will deprive the government of much needed oxygen to keep the machine moving forward. 

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Mark McGoldrick's picture

It doesn't matter what BP pays back to the government, because it's just fiat money, anyway.


These debts and penalties denominated in fiat  paper dollars are just scams, orchestrated by George Soros and the Shapiros. If the debts had been denominated in gold, silver, hams or PepperRidge Farm Pepperoni rolls, the penalties would be more meaningful - a true blow to the gut.  

However, by penalizing BP in fiat dollars, BP essentially gets to pay its penalties in counterfeit, Monopoly money that doesn't exist in the first place. So it really doesn't matter if the penalty is $10 or $10B.  It's all counterfeit, anyway.

Is this right?  After so many junks today, I'm just trying to fit in tonight.


Ahmeexnal's picture

Nice try Math Man. Next time at least change your IP.

Conrad Murray's picture

He may be on to something:

DXY April 20, 2010 - 81.05
DXY Current - 74.85

Gold April 20, 2010 - 1142
Gold Current - 1475

Regular Gasoline April 20, 2010 - 2.83
Regular Gasoline Current - 3.73

Wendy's Jr Bacon April 20, 2010 - 0.99
Wendy's Jr Bacon Current - 1.29

We should get some sort of consideration here...

Ted K's picture

We got "Different Strokes" to the world!!! Hmmmm!!!

DeadFred's picture

Thank you for the effort but if you don't believe in Jesus you can't fake Christianity, if you don't believe in Mohammed you won't pass for for a Muslim and if you aren't a zerohedger at heart your posts won't quite cut it.  Keep trying, maybe you'll get the faith.

Bananamerican's picture

" We rally against illegal immigration without questioning who built our houses"

the fuck you say....

i KNOW the head chopping, mass grave digging, gang banging, border sneaking, "resource" utilizin', bribe taking, revanchist, illiterate, shit smearing bastards didn't build mine

captain_menace's picture

I'm fairly certain that I've eaten a meal or two prepared by those who were not "fully" legal.

Burp.  And if memory serves... they were fine meals indeed.

Bananamerican's picture

I'm sure there are quite a few small businessmen who've retired early thanks to them...

businesses large and small who welcome their cheap labor and or ponzi dollars, army recruiters, city managers, politicians and homeowners who neither "ask" about their status nor "tell".....Fuck them ALL


From top to bottom, short term thinking has completely fucked this country..."Burp"


captain_menace's picture

Well, when I was a younger man, I spent a season on a tree-planting crew.  Half the crew were illegal immigrants.  For every one tree that an American planted, an illegal Mexican would plant two.  Doesn't take a genius to figure out the math.  I'd hire all Mexicans (regardless of citizenship status) if I were running a tree-planting operation.  They were better at the work, and I can say this having done the work myself.  And they were good cooks too... burp.

Bananamerican's picture


if having an entire country full of mexicans was such a boon, Mexico should be heaven on earth....or are you counting on the magic alchemy of "the american dream" to transmute the peoples of a failed State/Culture into Supermen?

Face it, MEXICANS have run away from other MEXICANS....and they've come up here the way pathogens invade a diseased host...They are nothing more (in aggregate) than Visigoths with mustaches.

Look, I'm glad you have gas & are useless at tree planting but I've seen J-lo's ass....& i don't...give...a...shit!

captain_menace's picture

I figured you wouldn't give a shit.  It's all good.

Good luck with your farming endeavors. 

Bananamerican's picture

and you with your Mexi-fed natural gas project...

They'll like you...You pet them

BigJim's picture

Can you tell me the difference between the government controlling who gets to work (and who doesn't), and any other kind of protectionism or cartelization? I'm sure you like being able to buy stuff made elsewhere, or at least having the choice. Yet according to you, if I want to employ someone, I have to check with Big Brother to find out if He thinks it's OK and they're sufficiently 'American' enough.

It seems to me that most of the perceived problem with 'illegals' is (I'm led to understand) that they can claim benefits from the US government without having paid taxes.

The problem here, though, isn't that they're claiming these benefits; the problem is that the US is a socialist state handing these benefits out to anyone in the US, regardless of whether they've paid into the pot or not.

Get rid of socialism, and only the hard working will immigrate into the US. They will drive up productivity, and everyone will benefit. And they won't claim state benefits because there won't be any state benefits to claim.

The US was founded and built by people who would be considered 'illegals' now - your ancestors included.

ibjamming's picture

You don't get's a polite way of saying "no brown people"...and I agree.   I want NO brown people around me whenerver possible...I just don't like them...and isn't that my RIGHT?  The right of association.'re missing the point...they shouldn't be "in the country to be applying for the job".


It's a culture thing...I huess you're not old enough to remember America BEFORE the fucking "civil rights" movement destroyed it.  Oh the good old days...

John Wilmot's picture

"Can you tell me the difference between the government controlling who gets to work (and who doesn't), and any other kind of protectionism or cartelization? I'm sure you like being able to buy stuff made elsewhere, or at least having the choice. Yet according to you, if I want to employ someone, I have to check with Big Brother to find out if He thinks it's OK and they're sufficiently 'American' enough." -Big Jim

Two words, NATIONAL SOVEREIGNTY. We have individual liberty with respect to one another, but we are part of a collective with respect to non-citizens: that is the meaning of a sovereign nation. A regulation fixing a minimum wage is a violation of individual liberty; while a regulation fining employers of illegal aliens is the proper work of the government of a sovereign nation. The alternative is housed at Brussels, which incidentally is a shit-hole of a city, the Detriot of Western Europe..

Midwest Prepper's picture

Yes, I agree that it is Mexicans fleeing Mexicans.  And I have also witnessed firsthand the awesome work ethic of these illegals. 

We will see a culling of the herd as soon as we eliminate citizenship for "anchor babies" and make it clear that, while we appreciate your hard work, we are not giving you and all your dependents all the welfare benefits (food stamps, health care that is better than I can afford, WIC, free school lunch, reduced tuition at college, etc).

The country is bankrupt and we think it's "unkind" to cut benefits that we cannot afford.  How kind is it to anyone that we let so many people on the liferaft that every single one of them drowns??? Well, here we are... the raft is sinking.... I just wish that moron Teddy Kennedy were still alive to watch the fruits of his labor.

FreedomGuy's picture

We should remember that we were the most popular destination for several hundred years before welfare, foodstamps, Medicaid, Social Security and the rest of the redistributionist crap. We also had unlimited immigration and it turned out pretty well. If you weren't brave and willing to support yourself and accept the risks of living didn't come. We had a Darwinian natural selection advantage in our immigration. Our problems eminate from socialism.

That is part of point of this article. We have artificially funded the voracious appetite of the leviathan state and now the system is breaking down and the bill is coming due. It's not because of Mexicans or anyone else. It's because of the fruits of socialism and the endless lies that go with it.

falak pema's picture

I did't know ZH was a religious sect...whose holy circle had as commonality some hidden dogma...other than logic and analysis of naked facts...alike naked, unadulterated, attractive feminine ductility,  whose only true existential mystery lies in its ability to defy logic to the point of making a complete fool out of that primal tool of the first Archimedean lever; that of male endeavor.

Kayman's picture

Gosh falak...

I think I hear a hand clapping in the forest....

As to the topic, I think most here at ZH are aware that the endgame is at hand.

Will this slow-motion economic train wreck continue, or will we hit the wall ?

Thanks for another great article Tyler.  A lifeline to sanity.

cosmictrainwreck's picture

good response. I was gonna post simply "WTF?"

captain_menace's picture

I agree with you.

But I was sad to see that you didn't add cans of Dinty Moore beef stew to your list of valuable assets.  Come on, PepperRidge Farm?

BigJim's picture

You really are a master of the specious.

Debt-based fiat money is indeed a scam. It is monopoly money to the Fed and the banking cartel, because they can create it at will while the rest of us have to work for it, and pay interest on something that cost them virtually nothing to create.

But as long as it has some value, and BP aren't allowed to print it, then BP paying a fine in the billions still costs them.

Now do you understand?

Kayman's picture

Don't waste your time BigJim, Mark either is having us on or he cannot tell the fuckee from the fucker.

vxpatel's picture

In a country where the numbers are rounded to the nearest 100,000,000,000


I have full confidence in our elected officials to focus on the things that really matter:



I am Jobe's picture

How about for drugs? WTF is wrong with these lawfucking makers.

Kayman's picture


Its a conman's trick. They don't want you looking at the real issue.  We are broke.

So instead of dealing with hard choices, the criminal banking cartel and their political whores enlist the MSM to create artificial "deadlines" with a shell game of saving trinkets.

Central Bankster's picture

So how long until they nationalize "private pensions", aka 401ks?

Selah's picture


Three to six months...


sschu's picture

... nationalize "private pensions", aka 401ks ...

IMHO, we will be given the "false choice" of redeeming our 401ks to avert a currency collapse.  2-4 years.


Inibo E. Exibo's picture

I'm sitting here pondering cashing out of my pitiful 401k, using half of it to buy silver and the other half to help a friend by investing in his farm.  I'm thinking a little bit of real money and fresh vegitables sound nice. Part of me says I'm crazy; part of me is wondering what am I waiting for.

bankonzhongguo's picture

After I did my farm thing (40 acres plus another 160 if it gets so crazy I can't leave the county), I just stopped worrying.

Something about eating fresh food (better nutrition helps the mind think) let me stop worrying and learned to love the bomb.

Knowing that I can buy, sell or trade (and grow) food for me and my family in addition to all the little weird things that keep me busy, lets one stop being a passive investor in markets that you have zero-hope in penetrating against the likes of GS and the Inter-Alpha Group.

Stop watching CNBC and plant a yarm (yard-farm) with your family.

Throw some ganga in it just to give The Finger to The Man.

Bananamerican's picture

recommend any sites to get going?

-Michelle-'s picture

Yes, this.  The more we plant, the less I worry.  Of course, it could all be taken away in one fell swoop, but at that point, it's almost beyond hope.

My retirement dreams have gone from MSM-induced to wanting to have a little land with a garden and orchard.  However, in the past couple of months we've realized that there's no point in waiting around for that.  We don't know if this is the house we'll spend the rest of our lives in, but we're starting to treat it like it is.  If we'd started planting 5 years ago when we first moved in, we'd be well-established by now.

In the past week, we've put in 12 trees: 2 pecan, 2 peach, 2 plum, 2 pomegranate, 2 banana, 1 orange, and 1 lemon.  We've got potatoes growing in trash cans.  We have what I think are the cheapest container gardens around: kid's wading pools.  They're filled with strawberries, carrots, tomatoes, and lettuce.  We've got cucumbers and onions and peppers and a bunch of herbs growing too.

Instead of watching TV, I'm practicing skills.  Baking bread.  Sewing.  Knitting.  Making soap.  We're homeschooling.  Everything we purchase is evaluated based on merit instead of impulse.  It is a 180 degree change in our thinking.  I regret we didn't do this sooner, but I'm thankful that we're doing it now.  I'm also thankful for an understanding husband who has come to appreciate all of my planning and prepping.  The threat of no pay for military over the last few days elicited no more than a shrug from either of us.

I have no illusions about how difficult it's going to get, but I'm done being frightened of it.  We will continue to do what it takes to make sure our children are fed, clothed, educated, and loved.

Bananamerican's picture

i like the kids wading pools idea...with drain holes?

-Michelle-'s picture

Yes.  We drilled a series of holes in the bottoms and then lined them with some leftover window screening (the coated kind) to keep the soil from draining out.

It may not be the most beautiful garden out there, but my plants are doing very well.

FreedomGuy's picture

I like your style. While I realize that things will get worse, I hope not so bad that we have a complete breakdown in society compelling the growing of one's own food. Good luck to all of us.

Dental Floss Tycoon's picture

"Throw some ganga in it just to give The Finger to The Man."

That ganga just might be your downfall.

With county and law enforcement budgets tight there is increasing interest in confiscating property.

This has been going on for a long time and is increasing.

Just type “confiscating property drugs” in a Google search and you will see what I mean.

Iam Rich's picture

Absolutely 100% this.  Do not give them a reason, they will take it.  Your finger to the "man" is your silver, your gold, and your garden.

New_Meat's picture

CB-not until the demo crowd gets back into power in the house.

although the skids are greased.

- Ned

honestann's picture

Oh, dear Faust, if it were only that easy.

The answer to this article is... IT IS THAT EASY.

That's right.  Get frugal.  Get out of debt.  Never borrow again.  And avoid the money-suction scams developed by the predators-that-be to steal your income.  Stop paying them, one way or the other.  Either stop earning profits [on the books], or stop paying, or leave the jurisdiction.  Do not feed them any more.

Stop thinking in terms of "society".  Such a mindset will not work.  Start thinking about your own life, your own income, your own expenses, your own behavior.  And ignore the sewer that is the rest of humanity.  We must COMPLETELY reject the notion "their fate is ours" and "their expenses are ours"... just as the predators and parasites must accept the exact same thing.  We must "just say no" to their scams.  We must simply take care of our own self and our own lives, and refuse to be sucked into the schemes of others.

NOBODY and nothing will solve the "problems of society".  Society has a terminal disease... and it should, must and will die.  Let society die.  Let individuals who produce live.

It is time for Atlas Shrugged, part 1... quit the system.

AN0NYM0US's picture



checking in, hopefully things are going well considering the circumstances - a giant oak falling on ones house is never a good thing - godspeed to you and the family