Roubini: “When Governments Reach the Point Where They Are Borrowing to Pay the Interest on Their Borrowing They Are … Running a Ponzi Scheme”

In a new essay in Forbes, Nouriel Roubini writes:

Net public debt is going to double as a share of GDP between 2008 and 2014. Even using the very optimistic forecasts of the Congressional Budget Office, which anticipate growth of around 4% over the next few years, the net debt burden will rise from 40% of GDP to 80%–that’s an increase in the debt stock of about $9 trillion. The interest charge alone on that increased debt will be in the region of $300 billion to $400 billion a year, which in turn may mean more borrowing to pay the interest if primary deficits are not reduced. When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme.

Ponzi schemes have a way of ending unhappily…

Roubini also touches on the issue of the credit ratings of sovereign nations:

Independent rating agencies have already downgraded the sovereign risk rating of countries like Greece and Ireland, and it cannot be ruled out that core economies of the OECD, including the U.S., could eventually be downgraded.

For background on sovereign credit issues, see this, For background on sovereign risk issues in general, see this.

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  • Exactly. Our banking and financial systems are schemes that we should understand in their broad strokes of design, and then demand their end. The policy response, loosely called "monetary reform," has been considered by many of our brightest historical minds for centuries. For my brief on monetary reform, and the annual trillion dollars of benefits to the American public, click on my name.

  • Every "dollar" in circulation in the US has been created as principal for a government security. Congress gives the Fed a security; the Fed creates a line of credit in the amount of the principal. Fiat money is created. To reduce the impact of inflationary money in circulation and to conceal the scheme from the public, the Treasury acts as auctioneer to sell the Fed's securities. The auction removes much of the new fiat money the same way the FOMC selling of assets reduces reserves. The fractional reserve scheme allows commercial banks to multiply the "reserve" funds that are left in the public domain after the auctioning of securities.With every dollar having been created as principal, when the debt is rolled over at maturity some of the new principal must be used to pay the interest on the earlier issued security. It already looks like a Ponzi scheme that was set up in 1913.

  • With the thought that I made an error in the procedure for submitting a comment, I will restate my observation.The Federal Reserve IS operating a Ponzi scheme. By design, the economy of the U.S. is a Ponzi scheme.When Congress wishes to spend money it does not have, it will give a security (bill, bond, or note) to the Fed and the Fed will establish a line of credit in the amount of the principal of the security.When first established, the agreement required interest to be paid to the Fed in the form of gold or gold certificates. After all of the gold in the U.S. was transferred to the Fed, the only form of “dollars” in circulation were Federal Reserve Notes. Every FRN is created as evidence of a security owed to the Fed—from the principal created as fiat money which Congress authorized.With all gold confiscated to the possession of the Fed, the only thing left available to pay the interest on the “loan” (FRN’s) from the Fed was the FRNs themselves. The only way value can be created to pay the interest on the initial issue of securities is to create new principal by the subsequent rollover of the initial debt. The interest due is paid from the new principal.The debt is perpetual. There is no way the debt can be repaid. Without the issuance of new debt, the interest on the initial indebtedness can not be paid. It is a classic PONZI scheme. As pointed out in the article, all Ponzi schemes are self destructive.The U.S. Treasury assists in concealing the scheme by acting as auctioneer for the selling of part of the new securities issued to fund the National Debt. The securities are owned by the Fed and the auction removes a major percentage of the fiat money created (reserves) in the same manner FOMC sales of assets removes reserves. Commercial banks then multiply the remaining reserves by the fractional reserve system.