Government Bond Ponzi Bubble Has To Bust


By Charles Biderman


I cannot get over Paul Krugman’s recent comment that as long as bond buyers keep buying US government debt, deficits do not matter.


Krugman said on NPR Tuesday, “The idea we should be obsessed with the deficit right now is insane, It’s crazy, the way that we created this fiscal cliff crisis out of thin air, when the government is able to borrow at just about the lowest interest rates in history.”


To Krugman, that means it does not matter that the US government is running a $1+ trillion annual deficit. So what if taxable income would have to grow by 50% just to generate enough taxes to pay the current deficit. And that assumes spending will not grow from today’s levels. How can that not matter?


Here’s what Krugman is missing. The main buyers of government bonds have been the big global banks, and there is only one reason they keep buying government bonds. if they don’t keep buying they will go broke as will the government.


These are the same institutions that have been bailed out by the US, European and Japanese central banks. How have the central banks bailed out the big banks? Simple, The central banks “bought” all the big banks toxic loans in exchange for newly printed paper.


So when these governments sell new bonds, one guess who are the big buyers? You are correct if you guessed that the same banks that were saved by the government now regularly buy all the government bonds being sold in order to keep the financial fraud intact.


Does any of that mean that government deficits do not matter? Or does it really mean that bond buyers know that their survival is based upon buying all the government bonds being offered them.


For example the financial media wants to make a big deal that bond rates have dropped on French, Spanish and Greek debt. But what the media does not report is that interest rates are dropping because the Euro banks are buying those new bonds using some of the billions given them by the ECB in exchange for their problem loans.


No Mr. Krugman US government bond buying is not happening because deficits do not matter. Bond buyers are buying because if they do not buy, their banks will go bust and they will lose their jobs.


This circular game of governments buying bad loans from banks who use the money to buy government bonds eventually will spin out of control. The widely-used expression of “kicking the can down the road,” really means the governments are kicking reality down the road, praying for a miraculous economic recovery that is not in the cards. As in all frauds, the perps are hoping for a miraculous score in order to paper over their lying thieving ways.


I do not see any chance of a miraculous economic recovery anytime soon. Therefore, the entire government bond Ponzi scheme has to collapse. The only question is when. My best guess is that will happen sometime during this current Obama administration.


And yes, the bond bust could get messy. But there is a robust underlying global economy based upon broadband that is growing rapidly. After the bust out, and we get our government obligations restructured, I predict there will be a miraculous economic recovery. But before the boom there will be a lot of pain.



6 Responses to Government Bond Ponzi Bubble Has To Bust

  1. Dick Green on December 7, 2012 at 10:00 pm

    In case you didn’t get my previous email (from Dec 5), the “Read More” link is broken (points to Jul 30). I was able to deduce the correct url so I could let you know in the Reply area for today.
    Have a nice weekend.
    BTW, I hate the preamble ads…as a subscriber, I resent it.

  2. Ed_B on December 8, 2012 at 2:00 am

    Someone should ask Mr. Krugman just how much of the US federal budget should be allocated to interest on the debt before it becomes an issue that does matter.

    I fully agree that US Government paper is in a horrendous bubble, probably the mother of ALL bubbles, and that it will implode at some point. While I cannot quantify this with data, I believe that the current road to disaster will run out of pavement sometime in 2014-15. Yes, that will be within the 2nd term of the Obama regime.

    While I would not trust the democrats to run a coffee kiosk at a profit, the republicans are little better. Having to choose candidates from one of these two parties reminds me of the teen movie, “Dumb and Dumber”. There is no mention of dumbest, however, so perhaps it is still possible for the current situation to be made worse by a public display of even less competence. Yes, I realize that this possibility staggers the imagination but there it is.

  3. buck novak on December 8, 2012 at 4:56 am

    The prospect of the government going bust thrills me to no end. I can hardly wait to see government workers carrying signs will work for food. Government workers at work, now that is an oxymoron.

  4. Martin Jacobs on December 10, 2012 at 5:02 pm

    Do the banks have a legal obligation to buy Govt. bonds using the money they got from the Govt. for their bad loans? What if they bought non Govt. debt or gold or some other assets? How would that lead to them going broke?

    • cbiderman on December 10, 2012 at 7:04 pm

      Banks will go broke when the government bonds they hold fail.

  5. Tom Sullivan on December 11, 2012 at 10:34 pm

    John Taylor has reported (June 8, 2012) the US the Federal Reserve is the main buyer of federal bonds, according to federal data. In 2011 the Fed bought 77% of all those new bonds.

    Taylor cites this source of the federal data:
    Federal Budget, FY2013 Historical Tables, Table 7.1: Federal Debt at the End of Year: 1940–2017.

    Government buying its own debt in such quantities is appalling, and ought to be illegal.

    Krugman is from another planet.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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