CHART: US debt reached 300 percent of GDP by the end of 2002. Debt has risen another third since then while GDP growth of 3.5 percent did not match this anywhere closely. Courtesy of Gabelli Funds
As US debt is nearing a level of 400 percent of GDP one question remains: How long can such an unprecedented situation be sustained? The Federal Reserve is truly caught between the danger of runaway inflation through higher energy prices and the danger of a financial collapse by higher interest rates which have already slowed down the property market in some regions. Recent money supply figures suggest that money is still around in abundance. See also this post.
This brings us to the question whether we actually see a Ponzi scheme. Every Ponzi scheme works as long as there is more money flowing in than taken out.
The Fed lends a helping hand in this process as it injects more liquidity than ever into the markets (look up the Treasury auction results), thereby neutralizing the tightening effect the rate rises should have. It is as simple as that: As long as lenders can borrow money and refinance a sum that includes the interest on the former debts the game can go on forever.
Only problem: It never went on forever.