US Government DEBT

Did you ever wonder how US monetary system works ? It is real magic in action that creates money from air and controls the rest of the world with it.

Allow me to explain how it works in very simple terms. Lets start with some history.

US government knew that costs of WWI would be very high, so after long debate it has been decided to finance it with a combination of government debt and raised taxes. In order to attract buyers interest paid had to be high. So when the time came to pay the interest US government didn't have the money. So it decided to borrow more... And this is how Treasury Bill or T-Bill was born. Various T-Bills were sold by the goverment to whoever was interested in buying them. The purchasers of T-Bills were getting interest paid at certain time period. Now for the sake of example lets assume that the total number of dollars or so called money supply in the entire world is x trillion dollars. If US government to finance its forever extending ambitions would simply print more money that would increase the money supply to say x+y trillion and therefore cause so called inflation which is simply decrease of the value of the money. This would happen because increase in money supply would increase demand for all goods and therefore would allow businesses to increase the price of goods. The price basically could be anything that people are willing or capable to pay it may have little to do with the real value of goods or services. Increases in prices or simply inflation is bad for everybody but thats a subject of another discussion. Therefore instead of printing more money US government decided to continue printing T-Bills which are basically piece of paper. These pieces of paper would be sold in exchage for real dollars already in circulation. So the money basically gets recycled. However there is an interest that needs to be paid on T-Bills. Because it relatively small, it would increase the money supply only slightly. Where US government is getting the money to pay the interest ? Its simply printing more T-bills! Sounds like a perfect system. And it was, but it was very difficult not to abuse it.
In reality United States is a big household living on a credit card. And we all know what credit card debt could be like. To make payments on the credit card the owner of the credit card just keeps borrowing. As any household in debt with very high income it was able to do it for very long time. But the party seems to be over.

Now according to an Aritcle by Sprott Asset Management there is a total of 10 trillion of current US public debt consisting of T-bills. This is very small part of total debt btw because there are other types of debt as well. In 2009, the US government must sell another $2,0041 trillion of new debt in order to finance projected budget deficit of $1.845 trillion and $196 billion of Iraq and Afghanistan expenses. The existing T-Bill buyers which consist of foreign countires, private investors, funds etc can't simply afford to buy so much. So who it will be sold to ???
US government will simply sell it to itself. US Treasury will print the T-Bill and US Federal Reserve will buy them. Where US Federal Reserve will find the money from ? It will simply print it! This will cause what ? Right it will cause inflation. Now like I said inflation is bad for everybody. However inflation is good for the debtor and in this case the debtor is United States. Its good because when the money is being devalued you need to return less than you have borrowed. So if you are thinking about getting a mortgage now is the time. Who are the major holders of US T-bills? Surprisingly the most powerful countries in the world like Japan, China, Germany, Russia etc. Why are they holding so much of it? Because it was supposed to be safe investment :) Therefore inflation is going to destroy virtually everybodys savings. Now is very good time for everybody to sell T-Bills and move money to some other currency you would say. The problem is that selling so much T-Bills at once will push their price down. So United States is basically holding the balls of the entire world with it debt. The world is very unhappy and it will find a way to penalize US for it. As I write this the governments of most countries in the world work on a plan of gradual disposal of T-bills they own. if US dollar one day will loose its status as the world default currency it will simply go into free fall and so will United States along with it. But because United States consumes as much as 40% of the world economic output this is also a bad scenario for everybody. So what does the future hold ? We will see.