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« Dr. Elizabeth Warren: The One-Woman Transparency Machine | Main | Bush's Third Term?...You're Living It (Deja Vu All Over Again) »

The Real Crisis Yet To Unfold


Guest post by Brett Buchanan from It'sNotRealMoney

When I recently read the Wegelin & Co. Investment Commentary 265 dated August 24, 2009, it became clear to me that what would appear to be a nation where public and private borrowing has simply spiraled out of control is in fact much worse than it appears. In reading the report I skimmed down to Section 5, titled The USA’s Achilles Heel. As I read the section it became abundantly apparent that amidst all the bailout and stimulus money flying around there is an even greater story, a devastating one, the likes of which has not found its way into the main stream media. The story goes like this.

From the Wegelin & Co. Investment Commentary - A look at who are the most important creditors of America’s highly indebted public finances reveals something truly remarkable. It is the public authorities themselves! A study by Sprott Asset Management, a Canadian asset management firm distinguished for its intelligent macroeconomic analyses, showed that in 2008 over 4 trillion of the total outstanding public debt of some 10 trillion, or around 40 percent, was in the hands of so-called “intragovernmental holdings”. These holdings include social welfare institutions, whose assets, accumulated in order to be (halfway) able to meet future liabilities, are invested in special Treasury debt instruments, known as “intragovernmental bonds”. In other words, the paying recipient of, say, Medicare, the American health service, is an indirect source of finance for the Treasury. Unusual, remarkable, or rather, alarming? Debtors are now simultaneously creditors.


Many Americans are aware that our government has been tapping the tills of Social Security and Medicare but the methods by which they are doing it are so destructive the ramifications are nearly unimaginable. The Wegelin report states emphatically that our nation’s public trust funds – trusts that are theoretically funded by US taxpayer dollars and government (deficit) borrowings – are in fact holders of 40% of outstanding US Treasury debt (see chart above). Think about that. A parallel scenario would be one man taking out a credit card to pay another man back for money loaned to the first man from the second man’s credit card – but in reality they’re both using the same credit card. And they keep doing it over and over and over. I actually laughed when I wrapped my mind around that one.

These “intragovernmental bonds” are certainly not assets of genuine intrinsic value. Were we to consolidate both balance sheets – that of the Treasury and that of the institution concerned – it would produce a tautologous situation that would result in the total loss of value of the social welfare trust’s assets if the Treasury were in a position to avail itself of the capital market to an even greater extent.

It is no wonder that the Obama administration would fight so hard to grow this nation’s health care system to megalithic proportions. In doing so they would create yet another mechanism by which to mask the transfer of government deficits behind the veil of shadow accounting. Clinton used similar methods to create ’shadow’ surpluses by shifting social security tax receipts as income (credits) with no offsetting debit for future liability. Viola’. Surplus. Just like magic. Now Obama is headed down the same shadowy path. While the fate of Obama’s health care plan is yet to be determined, if it were to pass into legislation one thing is for certain – the US taxpayer would suffer unnecessary costs when public funds are mismanaged through shadow accounting.

And of course, as always, on the sideline stands the Federal Reserve – no doubt cheerleading for a new source of public fund manipulation so as to push private losses onto the public balance sheet. If the Obama health care plan fails to pass in Congress the ultimate culmination of this crisis will come sooner rather than later as the Fed and Treasury will have one less slush fund to tap.

My take-away from the Wegelin & Co. report is this – when the music stops who will be left standing?  Foreign holders of our debt?  Or perhaps the American citizenry?  Therein lies the real crisis yet to unfold.  Someone is going to stiffed.

The Wegelin report is titled, Farewell America. While I hope this title is either premature or incorrect altogether, I fear my hopes are naive. Perhaps a more appropriate title might have been, Farewell Trust – because If there’s one thing this crisis has taught me, maybe all of us, it’s that trust, the foundation on which all capitalism is born, is gone.


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Reader Comments (21)

Sep 16, 2009 at 12:11 PM | Registered CommenterDailyBail
We wrote in August about intra-governmental borrowing and debt holding in this debt piece below...some decent info in here...

Sep 16, 2009 at 12:12 PM | Registered CommenterDailyBail
The archive of national debt and deficit stories...there's a lot from this node:

Sep 16, 2009 at 12:14 PM | Registered CommenterDailyBail
The Story That Made Me Tear Up My Prepared Speech at a Big Education Conference


From Arianna Huffington, whom I know makes some of you puke up gurgled sounds of ZSA Zsa Gabor...

But the article is outstanding...take a minute...

And here is the article that got Arianna worked up from the NY Times:

Sep 16, 2009 at 12:17 PM | Registered CommenterDailyBail

Another great article.


Love the garbage truck pic.
Sep 16, 2009 at 4:12 PM | Unregistered CommenterJames H
The PPIP lives!

"FDIC Names First Winner In Toxic Asset Program"

This was the part that killed me:

"The sale is part of the government's so-called Public-Private Investment Program, announced in March by the FDIC, Treasury Department and Federal Reserve as one of the financial recovery measures. The backing for the private investors' purchases is coming from the $700 billion federal bailout fund, with the government matching private investors dollar for dollar and sharing any profits equally."

Anyone want to play Where's the Missing Piece?, or What's Wrong With This Picture? Unless the program has been totally revamped, AP Business writer, Marcy Gordon, left out the whole non-recourse, taxpayer-on-the-hook part of this little deal.
Sep 16, 2009 at 4:16 PM | Unregistered CommenterJames H
Thank you Brett Buchanan, great job! I will look forward to more of your posts. The world is playing a game of Russian Roulette and Obama is forcing us to play rather than leading us by helping us face some harsh truths before it is too late.
Sep 16, 2009 at 4:36 PM | Unregistered CommenterGobias Bluth
Mr. Obama

Your Election promises turning into all lies. How could you have a soul and mislead with your speeches and your actions are contrary?

Wall Street/Bankers Criminals bailed out and you said no more reckless bubbles? But every garbage stock is turned bigger bubble before the crisis began?

$4B + looted by Corporate crooks with ZERO COST STOCK OPTIONS worthless paper from our PENSIONS. Pension Liabilities keep rising and why?

Every scam bubble is met with a crash and phony wealth effect vanishes with every crash.......=PENSION COMPLETE BUST IS NEXT
Sep 16, 2009 at 4:50 PM | Unregistered CommenterKen
"Obama is forcing us to play rather than leading us by helping us face some harsh truths before it is too late."

Gobias, you're starting to sound like that right-wing, conservative James Howard Kunstler:

"All this is to say why it is so dispiriting to see Mr. Obama's White House mount a campaign to sustain the unsustainable in the economic realm. Everything they've done for four months involving money management and enterprise policy -- from backstopping hopeless banks, to gaming the bankruptcies of the big car companies, to the bungled efforts to prop up artificially-high house prices -- amounts to a gigantic exercise in futility. Worse, it gives off odors of dishonesty or stupidity, since the ominous tendings of our system are so starkly self-evident."

Sep 16, 2009 at 4:54 PM | Unregistered CommenterJames H
James H.

Debates now are meaningless, Bamboozled generation will go on rampage when in shear strangled pain. Our Politicians give a dam to the working class. I don't see any united effort for revolt. I just see race being injected in to make GOP go crazy.LOL
This Jimmy Carter was a nightmare for USA , so will be OBAMA. Jimmy Carter clown brings race into the wrestling pit.

Almost all important, pertinent data reflects continued weakness in the economy, especially retail sales and unemployment.

There are small signs of inflation in spite of bogus government figures. In the flight to quality we see stronger gold, silver and commodities despite heavy market manipulation by the government.
After more then two years of government and Fed intervention in the economy, only banks, Wall Street and insurance companies have been bailed out. The first part of the Stimulus package was unsuccessful, because the funds were not spent, they were used to eliminate debt. We do not think the next stimulus wave will be any more successful. The economy should now move sideways for a year with slight GDP gains and a slowing in job losses. There will be no dramatic changes unless banks start lending in a bigger way or there is another $2 trillion stimulus package.

Interest rates have moved slightly lower as the Fed’s intervention drives bonds up and yields lower. That will end early next year as demands for funds from both the private sector and government increases. Global capital has not expanded to meet those needs. Fed monetization of $500 billion is what foreign central banks are using to buy our Treasuries. Eventually the adverse effects of excess money and credit creation and budget deficits will take their toll. Commodity prices are already reflecting a flight to quality and gold and silver are attempting to make new highs. Wall Street and Washington tell us there is no inflation. If that were so why would gold and silver be acting in such a manner? The answer is flight to quality. There are no solid currencies left in the world to compete with gold, the only real money. This past week government repulsed breakout attempts by both gold and silver, but no matter what they do they will be eventually overwhelmed as more and more gold and silver will become the destination for hot money. The hedge against prolonged recession is in place and will be augmented soon by growing inflation. A double barreled dynamic.

We currently have bubbles in both the stock market and Treasury market, both created by the Fed. Any reappearance of inflation will very negatively affect both markets. When these markets break, which they eventually must, you will again see horror among investors and many more bankruptcies. The increase of M3 by 14% for ten years has to be worked out of the system and it will be. Destabilizing is on its way. Just be patient. This depression in many respects is already worse than the 1930s and it will continue to deteriorate. There is no chance we will see sound money anytime soon. We are a minimum of ten years away from any kind of recovery and probably much more.
Sep 16, 2009 at 5:25 PM | Unregistered CommenterKen

One good news for ray of Hope for Dr. Ron paul Revolution

WE DID IT! HR 1207 now has the 290 for the 2/3 majority! - END THE FED + 290 on the same day!!!
Posted September 16th, 2009 by sunny

289 + 1 = 290.
i just confirmed it with ron's dc office.

ok guys! how cool is this??? - 290 and END THE FED happening on the same day!!!
Sep 16, 2009 at 5:31 PM | Unregistered CommenterKen
Good link on 290 co-sponsors Ken...hadn't seen that....outstanding...

And great link from Kunstler...loved that...
Sep 16, 2009 at 6:01 PM | Registered CommenterDailyBail
Dear Fellow Americans

You want to see Farmer suffering in Europe? Waht about our farmers next in USA?

Have you folks seen, California ,FRESNO farmers water supply cut and 40% Unemployment in Fresno, California

Europe's farmers more than crying over spilled milk: see in color pictures


World Hunger Over 1 Billion: But Fresno Farms are Denied Water to Protect Minnow

Welcome to Mendota, Calif. Its population is 10,000. Most of its families work in farming; the town used to be called the "cantaloupe capital of the world." Today, unemployment hovers around 41 percent. The town is now known as "the food-line capital," says Mendota's mayor, Robert Silva. This is the Dust Bowl, circa 2009.

Mendota is located in Fresno County, where July unemployment stood at 15 percent. And even that staggering number is artificially low because of all the temporary employees hired to pick the seasonal vegetables like squash, carrots, tomatoes and peppers.

Why are the communities of Fresno County suffering so deeply? Because in December 2008, the federal government decided that Fresno County, a farming-rich area which provides half of America's vegetables, no longer needed water. The farmers whose ancestors built the canals to irrigate the Central Valley have been totally cut off from their water supply, even though they're still paying bills for it. Hundreds of acres of prime farming land lie fallow, crops withered and dead.

All because the federal government thinks that smelt – tiny 5- to 7-centimeter fish – are more important than human beings. It seems that these annoying little creatures have been filleted by the water pumping systems necessary to make irrigation possible. They are now endangered. As the Fish and Wildlife Service put it, "It is the Service's biological opinion that the coordinated operations of the Central Valley Project and State Water Project, as proposed, are likely to jeopardize the continued existence of the delta smelt." In other words, all water supply must be shut down, lest the world lose the incomparably valuable smelt.

Sep 16, 2009 at 6:16 PM | Unregistered CommenterKen
"A study by Sprott Asset Management, a Canadian asset management firm distinguished for its intelligent macroeconomic analyses"

Too bad they can't manage money. Just look at their disastrous fund performances over the past 18 months as well a losing half the money the managed back before the crash.
Sep 16, 2009 at 11:00 PM | Unregistered CommenterTiiu Leek
Excellent post Brett.

It is ironic that if a business or labor organization were to "play" with worker retirements and benefits in this fashion, the government would be quick to respond, calling it a theft or racketeering.

Yet when they do it, all is well.

I guess that is why they don't pay into S.S., because they would feel horrible stealing from themselves.

"And of course, as always, on the sideline stands the Federal Reserve – no doubt cheerleading for a new source of public fund manipulation so as to push private losses onto the public balance sheet. "

Lets make no mistake, the FED cheers both sides, and controls both arguements to distract the "herds".
Sep 17, 2009 at 6:43 AM | Unregistered CommenterS. Gompers
Another Pariot comes forward

Letter from Peter Schiff Declaring Senate Run
Posted September 17th, 2009 by FrozenPie

Dear Friend,

Well, it looks like you have made a difference.

Based upon the unbelievable support that I have received from 10,000 supporters like you, I have decided to throw my hat into the ring to challenge Chris Dodd for the honor of representing the state of Connecticut in the United States Senate. I will announce my candidacy on MSNBC's Morning Joe show on Thursday, September 17 at 8:15am eastern time. Sorry for the short notice, but its important to honor commitments and keep these things under raps until the day the news breaks.

At this time last year I could not have imagined that that I would be making such an announcement today. I had never intended to become a candidate for public office. But these are extraordinary times. Our economy is falling apart in front of our eyes and Washington seems intent on making the wheels come off even faster. At a time when we desperately need adult supervison, the economically illiterate are running the show. As I love my country, it now seems clear that I must try to do something to help. The emotional and material support I have received from across the country has made the decision much easier.

So today it begins. As I'm sure you are aware, the rules in politics bear only scant resemblance to those which govern polite society. As a result, I am wading into strange waters, and I'm sure strange things will happen. But I promise to maintain my composure and give it my best shot. Based on the support that I have received thus far, I fully expect to be facing down Chris Dodd in the general election just 14 months from now.

As my campaign takes flight, I appreciate the patience and trust that you have shown. To commit time and money to a long shot candidate for high office is a hard choice. I hope to repay that trust with a first class campaign.

I look forward to your feedback and your continued support.

Thanks again,

Peter Schiff
Sep 17, 2009 at 9:15 AM | Unregistered CommenterKen
This article is important because it points out publicly available information that no one is really talking about. Its not like the treasury is trying to HIDE this info: http://www.treasurydirect.gov/govt/reports/pd/mspd/2009/opds082009.pdf
Sep 18, 2009 at 10:31 AM | Unregistered CommenterAndy
Lets make no mistake, the FED cheers both sides, and controls both arguements to distract the "herds".

Sep 23, 2009 at 12:57 AM | Registered CommenterDailyBail
DB, have you given up atheism? LOL
Sep 23, 2009 at 6:59 AM | Unregistered CommenterS. Gompers
Nope...It's all still mythological Santa Claus to me...

no disrespect intended to any believers...
Sep 23, 2009 at 7:07 AM | Registered CommenterDailyBail
A lot of great comments. Sorry I was unable to come back until now and read through them. My time has been consumed recently by a new project - one that when my partner and I launch it will be an eye-opening look into the financial markets and what a scam they really are.

But back on point - that our political and economic system has de-evolved into whatever definition you want to give it right now is no longer surprising to me. And that our government would rob-Peter-to-pay-Paul is now for me, a cliche.

When this crisis first broke I was leaning toward the 'evil empire' camp, believing that something this big had to have a serpent's head somewhere - the Fed, the BIS, Goldman Sachs. I thought for sure this was no accident. If you think about it, it's actually more comforting that there would be someone or something to point our finger at and say, "They caused this," and be absolutely certain in our accusation. And while there are most definitely the usual suspects at the core of this crisis what is most shocking is that I'm actually starting to believe that they, in their however misguided infinite wisdom, actually believe they have no culpability in the events that led to our present malaise. This to me is scarier than any definable conspiracy ever could be. That our entire monetary system is run by a bunch of guys who actually believe that their debt-based fiat monetary model is a sustainable, workable economic structure that can provide for a level playing field across socioeconomic boundaries wherein opportunities for the advancement and growth of wealth amongst all classes of people - however misguided that belief may be - is in fact the serpent's head.

These guys truly believe that leveraged finance capitalism facilitated by a fiat monetary system is the way to spread wealth and capital amongst the world. Of course they set themselves up as the beneficiaries of this system. Who can blame them? But in reality all fiat based finance capitalism creates is a vacuum - with unsustainable interest payments as its fuel. I don't know how they can't see this. Maybe they do and it is all one big conspiracy after all.

What I do know for sure is that we are in a death spiral right now. How long we remain on the operating table and whether we can be revived is now up to the surgical team. The problem is that the surgical team put us there in the first place and if we live we'll probably sue them for malpractice.

Brett Buchanan
Sep 23, 2009 at 1:21 PM | Unregistered CommenterBrett Buchanan

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