TrimTabs’ Biderman: Government-Bond Ponzi Bubble Has to Burst

Friday, 07 Dec 2012 01:38 PM

By Michael Kling

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The government bond bubble will burst, warns Charles Biderman, CEO of TrimTabs Investment Research.

The main buyers of government bonds have been large global banks that have to keep buying the bonds because if they don’t, both they and the government will go broke, he maintains.

The banks buying government bonds were the same institutions that central banks rescued by purchasing their bad loans.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

"This circular game of governments buying bad loans from banks that use the money to buy government bonds will eventually spin out of control."

Biderman takes issue with the New York Times columnist Paul Krugman's argument against being worried about the deficit.

"I cannot get over Paul Krugman's recent comment that as long as bond buyers keep buying US government debt, deficits do not matter."

The government is running an annual deficit over $1 trillion, Biderman says, adding that taxable income would have to grow by more than 50 percent just to generate enough taxes to cover the current deficit, even if spending does not increase.

The situation is similar in Europe where banks use money from the European Central Bank to buy government bonds and drive down bond interest rates.

Governments are "kicking the can down the road" and hoping a savior in the form of an implausible economic recovery, he asserts.

"I do not see any chance of a miraculous economic recovery anytime soon. Therefore, the entire government bond Ponzi scheme has to collapse," he warns, predicting the collapse will probably occur during the Obama administration.

Biderman predicts an global economic boom, prompted by rapidly growing broadband, only after a bond collapse and government debt restructuring.

Commentators have been predicting that the bond bubble is about to burst for years, notes James Bianco of Bianco Research in The Big Picture blog. They've repeatedly said interest rates will shoot up, but their predictions have failed to materials, he says.

"At some point the bond bears are going to be right. But after a decade of crying wolf, it is hard to listen to these calls."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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