Mr. Bond Arrives, Licensed to Kill
“The name is Bond… James Bond.”
Who doesn’t know that line? It’s iconic, from a long string of Bond-genre spy films going back to the original motion picture “Dr. No” in 1962.
James Bond was a British agent, code named 007. He had a license to kill, coupled with uncanny abilities to shape events. Often as not, his efforts involved superhuman physical prowess, not the least of which were martial arts, accurate gunfire, and a certain way with ladies.
Bad guys feared Mr. Bond because, for them, a visit from 007 often proved fatal.
Licensed to kill.1
Today there’s another Mr. Bond out there. This one is affiliated with the U.S. Treasury, but not that cabinet agency’s famous Secret Service. He’s more of a numbers kind of guy.
Actually, this Bond isn’t even a real person, although we’ll still call him Mr. Bond, the masculine form. His full name is… Mr. Treasury Bond.
Like his British analog, when this Bond shows up, he makes trouble.
Because Mr. Treasury Bond also has a license to kill.
Let’s dig into this…
For our purposes, Mr. Treasury Bond holds a critical position. He’s like a sniper with his gun trained on the system by which the U.S. government finances its vast, global operations.
Right now, he’s using his special license. That is, Mr. Treasury Bond is aiming to kill the business model of the U.S. government.
Much like how James Bond eliminates bad guys, Treasury Bond is about to target the U.S. federal financial process, take off its head, break its neck, blow it up, burn it down and generally crater the entire system.
In no uncertain terms, Mr. Treasury Bond is telling us that the ways and means by which the U.S. government raises and spends money are over, done with, finished, dead as a doornail.
Details in a moment.
But first, as with all good action dramas, let’s set the stage.
Begin with all the money the U.S. government spends, meaning those astronomical trillions you hear about. These payouts include everything from Social Security and Medicare to salaries and pensions, to defense, highways, agriculture, national parks, foreign aid, bridges to nowhere, stimmy checks and much more.
Every dime paid by the government comes out of the U.S. Treasury. And consider that, one way or another, the Treasury must raise that money in order to issue it.
So where does the U.S. government get the money? In the olden days, it was mostly customs duties on imports. But in modern times, it’s taxes.
You know the drill. The government raises money via individual taxes, business taxes, estate taxes, etc. You’re more than familiar with it, no doubt. You’ve certainly filed a tax return or two.
But do you know how much money the government pulls in? Here’s a breakout from 2019, courtesy of the St. Louis branch of the Federal Reserve:
Federal revenue 2019. St. Louis Fed.2
Obviously, the government rakes in a lot of money. But in recent decades, tax receipts haven’t covered the national budget — not even close. It’s out of control.
In 2020, the U.S. government spent $1.91 for every dollar it raised in taxes. That is, the feds outspent their income by 91%. (It would be like if you earned $100,000 last year but spent $191,000.)
Specifically, in 2020, the federal government collected $3.42 trillion in revenue. At the same time, the government spent $6.55 trillion. Here’s the chart:
U.S. government 2020 collections, expenses, deficit. St. Louis Fed.3
All of that 2020 federal deficit of $3.13 trillion went straight to the national debt, which is large and has been growing like gangbusters. Right now, it’s up around $28 trillion. See here:
U.S. national debt, 1960s to 3rd quarter 2020. St. Louis Fed.4
The point is that for many decades, the business model of the U.S. government has been based on spending far more than it raises and funding the difference with debt, debt, and more debt.
Which brings us back to Mr. Bond… Mr. Treasury Bond.
When the government must borrow money to fund operations, it issues bonds and promises to pay the loan back with interest, a rate set (for our purposes) by Mr. Treasury Bond.
For serious cash, the Treasury auctions bonds to big buyers like large corporations, big banks, and foreign sovereign governments.
Among cash-rich foreigners, large bond customers have long included oil export powerhouses like Saudi Arabia and others. Or European nations with large trade surpluses with the U.S., like Germany. Or other large exporters with trade surpluses, such as Japan and China.
It helps that we live in a world where the U.S. dollar has long been the so-called “reserve currency” (the origins of which I discussed here). Pretty much every nation in the world has routinely bought and held U.S. bonds as a matter of ensuring financial/monetary liquidity within the system of global trade calculated in dollars.
But in recent years, the U.S. government has developed a gargantuan money problem. Congress spends way more than the country can pay for, as we’ve seen.
Also recently, federal borrowing is so massive that there simply aren’t enough traditional lenders to soak up the Treasury department’s need for dollars. Not at advertised interest rates, in any case.
In other words, the U.S. government has tried to have the best of all worlds: borrow trillions of dollars yet pay extremely low interest rates.
Meanwhile, for many reasons, the U.S. has alienated significant bond buyers. Anymore, Russia buys almost no U.S. bonds. China has throttled back. And many oil exporting nations are no longer big customers either.
So while the Treasury requires funds to pay for profligate spending by the U.S government, many foreign buyers have decided not to participate.
Meanwhile, since 2008, the Treasury has offered a pittance in terms of low (aka “near-zero”) interest rates. Compared with inflation, real rates are effectively negative, meaning that a lender loses purchasing power over time.
In other words, the Treasury offers what writer James Grant calls “interest-free risk.”
In the absence of buyers from the rest of the world (businesses, banks and other nations), the solution has been for the Fed to buy those U.S. bonds.
The Fed “pays” for the bonds with magic money that it conjures up on its books, by virtue of being the nation’s central bank. Then the Fed carries these bonds on its balance sheet.
You can see the trend here, in a chart courtesy of the Peterson Foundation:
Fed Treasury holdings. Peterson Foundation.5
In 2020, the Fed bought about 54% of bonds issued by the Treasury. From all appearances, Fed bond purchases are rising even more in 2021.
Consider current news, namely the recent $1.9 trillion spending blowout bill that Congress passed for alleged “Covid relief.” I discussed it here.
Then we’re also looking at a probable $3 trillion “infrastructure” bill in the weeks or months to come.6
This $4.9 trillion of new/likely spending is far above tax receipts; hence, it’ll be financed with more massive borrowing and by implication massive bond purchases by the Fed.
It’s a measure of the deep dysfunction within American politics, where budgeting and spending are out of control. Monetary disaster is baked into all this spending and debt.
And through it all, the grim reaper is just outside the door, the aforementioned Mr. Treasury Bond.
Unlike James Bond, who typically uses a Walther PPK pistol, Mr. Treasury Bond uses interest rates to take down people and governments that do bad things.
Along these lines, Mr. Treasury Bond is lurking in the shadows giving away his presence via the table of long-term interest rates for U.S. 10- and 20-year paper, published by the U.S. Treasury.
Since the beginning of 2021, Mr. Treasury Bond has moved long-term rates steadily upwards from 1.46% to 2.36% — a rise of 61%.
In other words, it’s about to cost the U.S. government much more to service its debt, with higher rates coming down the tracks like a runaway train.
Mr. Treasury Bond has thrown the switch on the rails and changed the direction of global finance toward a secular bear market for U.S. paper.
The Fed is powerless to reverse this bad situation because of that vast book of federal debt. Borrow more? Well, it’ll cost you big-time, says Mr. Treasury Bond.
Very few people, either in or out of finance, know what to do now. Few are personally familiar with what’s about to happen, let alone how badly the roof is ready to cave in.
The last secular bear market in Treasuries ended in 1981 after a long run that began in 1945. In other words, as we look at a reversal of rate patterns, per Mr. Treasury Bond, we see long-term trends that are impossible to resist once they fire off.
Rising rates are a death sentence for the current modus operandi of the U.S. spend-spend-spend approach to governance. They’re nothing less than catastrophic for the federal budget, and likely sooner rather than later.
Due to the exertions of Mr. Treasury Bond, the U.S. government is on the railroad to Brokeville.
With rising rates, the dollar could quickly transform to peso-like status, definitely after it loses its appeal as a global reserve currency. In that case, the monetary viability of the U.S. government is in serious doubt.
Sure, the Fed can “print more money,” as the saying goes. Yeah, right. That’s all the institution seems to know how to do on its best days.
But then, it raises the age-old question, what is the basis of the money that the Fed emits? We’ve discussed it before, here.
If you’re immune to the effects of monetarist Kool Aid, you know that Fed-issued money supply is not true wealth; it’s just a claim on wealth.
The dastardly angle here is that in the current era, all that conjured-up money has benefitted whoever happened to get their greedy mitts on it early in the issuance cycle. (Looking at you, Wall Street.)
It’s why we’ve seen such asset inflation in stocks, fancy real estate, artwork and the like.
But as we’ve discussed before, a real economy makes real things. And looking ahead, the Fed issuing more debt doesn’t make the country richer. It makes it poorer.
A Niagara of new currency is not a fix. Something like that has never had a happy ending for any government, anywhere, anytime in all of recorded history.
Now inflation is rapidly building across the economy. It’s partly due to destruction of production over the past year and related distortions across global supply chains. Blame the draconian government policies from the Covid unpleasantness.
And much inflation is due to too much new money chasing the same old supplies of goods, as the foundations of U.S. government finance begins to crumble.
In other words, inflation is about to become a horrible fact of American life.
And Mr. Treasury Bond will walk away into the sunset, mimicking his 007 counterpart. But not necessarily a James Bond-like happy ending.
What can you do? Well, I have one suggestion.
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If you’re at all interested in precious metals and the mining space, it’ll be time well spent.
On that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Managing Editor, Whiskey & Gunpowder
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6 Biden Team Prepares $3 Trillion in New Spending for the Economy, The New York Times