Eric Sprott and David Franklin, of Sprott Asset Management, say that government debt issuance is turning into an investment scam.
“Our concern is that this is all starting to resemble one giant Ponzi scheme,” the two write in a report to customers.
They note that the Federal Reserve bought $286 billion, or 15 percent, of the new Treasurys issued in fiscal 2009.
“We are now in a situation . . . where the Fed is printing dollars to buy Treasurys as a means of faking the Treasury’s ability to attract outside capital,” Sprott and Franklin write.
Meanwhile, buyers the Fed calls “The Household Sector” purchased $528 billion of Treasurys in the first three quarters of fiscal 2009.
But that category just represents residual buyers whom the Fed can’t identify.
“The fact that the Federal Reserve and Treasury can’t identify the second largest buyer of Treasury securities this year proves that the traditional buyers are not keeping pace with the government’s deficit spending,” Sprott and Franklin argue.
“It makes us wonder if it’s all just a Ponzi scheme.”
Sprott and Franklin aren’t alone in their concern about U.S. debt.
Moody’s Investors Service says the U.S. could one day lose its Triple-A credit rating.
Under its most pessimistic scenario, the U.S. would be downgraded in 2013 if the economy remains sluggish, interest rates appreciate, the deficit continues to balloon and banks that received bailouts are unable to pay the government back.
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