Had some feedback in the comments section that requires a longer answer:

MarkS Says:

May 29, 2010 at 11:15 am e
I’m familiar with TPCs position. He would say that you don’t understand the monetary system because you are thinking in terms of the gold standard. The bond market funds nothing in a country where the government has monopoly supply of currency issuance. The bond market funds nothing.

I would explore TPCs comments further. The dude knows his stuff and has contacts in the Fed and banking system that most don’t. I think he’s dead right and he’s been scary accurate in his market calls and macro outlook. I think you’re barking up the wrong tree here duc. Thanks for the good work though!

Ok first off, let me address the monetary system. The monetary system of the US is based on a fiat currency system. This means that the issue of fiat currency has no backing of goods/services produced. It is backed by faith alone.

The Bond market, is the market for debt. The Treasury market is simply the market for government debt. The government requires “money” with which to purchase goods/services that exceeds their [government] tax revenues. The government has three options: [a] increase taxes [revenues] or reduce expenditures, [b] borrow money, [c] print more money.

Generally increasing taxes is hugely unpopular, and would result in their being removed from office. Printing money is surreptiously undertaken via creating demand deposits, which happens all the time, and money is also borrowed via the Treasury Bond market.

Creating demand deposits is inflation at it’s most basic level, and is executed via the banking system, pyramided upon the Central Bank, the Federal Reserve system.

With regard to loans taken by government via the Bond market, this is debt, with interest contracted at the floated rate, fixed for the term of maturity. This debt must be serviced. The purchasers of this debt are the creditors of the US government, viz. China, Japan, etc.

Thus the Bond market funds the deficit between tax revenue and government expenditure that the government incurs. This deficit can only be paid by either borrowing, or debasing, assuming tax hikes need to be avoided or cannot be coerced from the population.

With regard to TPC on this issue, he is categorically incorrect. As to the appeal to higher authority to support your argument, viz. TPC’s connections to Treasury et al, this is a logical fallacy, and adds nothing to your argument.

jog on