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As I have pointed out on a number of occasions in the past, the U.S.'s Ponzi-scheme economy requires massive and rising borrowing (on into infinity) in order to avoid financial implosion on the more than $57 trillion in total public/private debt – which does not include the additional $70 trillion or so in unfunded liabilities that the U.S. government hides from its balance-sheet.

For years, the legions of U.S. perma-bulls have scoffed at the suggestion that foreign investors would ever stop financing excessive U.S. spending/consumption. It is now time for the economic commentators who live in the real world to scoff at the perma-bulls.

The Treasury Department just released its July “TIC report” which measures the capital flows into/out of the U.S. economy. For years, this number could be counted upon to show a net inflow which exceeded $100 billion/month. During the worst of last fall's U.S.-created crisis/meltdown, the inflows for October alone exceeded $260 billion.

Those days are gone. In July, foreign investors were net sellers of $97.5 billion of U.S. financial instruments, and in this debt-saturated economy, this means they were dumping U.S. debt. The number would have been much worse if not for the fact that “official” foreign capital flows (i.e. the purchases by friendly governments) were +$33 billion for July. Private investors actually dumped a net $130 billion in U.S. debt.

This is not a new development. Capital flows have been “negative” (i.e. money has been flowing out of the U.S. economy) every month this year except for March, which reported a very small, positive net reading (view this data for yourselves).

As a starting point, these traditional inflows have been necessary to fund the U.S.'s trade deficit and current account deficit. Every dollar of those deficits which is not offset through foreign investment (i.e. purchases of debt) must simply be printed up on “Helicopter” Ben's magic printing-press – which supposedly can print up infinite amounts of new “money” without diluting all the trillions of existing U.S. dollars (i.e. without inflation).

The fact is that there will never be any more foreign demand for U.S. debt, unless/until U.S. interest rates rise high enough to compensate foreign investors for the high risk of default and the enormous inflationary pressures building up in the U.S. economy, as a result of the current reckless creation of new money and debt.

Just as U.S. perma-bulls have discovered the myth that foreign investors would “always” be willing to load up on more U.S. debt, these same deluded zealots are about to discover that there is nothing “magical” about Bernanke's printing press. The U.S. government may be able to grossly manipulate markets over a short-term basis, but it is utterly incapable of repealing the rules of arithmetic.

As any decent economic commentator can tell you, “inflation” is a monetary phenomenon. That is, by definition “inflation” refers to increasing the money supply. With a healthy economy, economic growth can offset some or even all of that new, money-creation (if growth is strong, or money-creation is restrained). With a shrinking economy, every new dollar created represents pure dilution of the currency.

What causes confusion (and ignorance) among most observers of markets is that such inflation is not immediately transmitted into rising retail prices (what most people call “inflation”). And when those price increases begin, they are not evenly distributed through an economy. Some prices will rise more than the rate of money-creation, while some prices will rise more slowly.

The reason for this uneven rate of change in prices is due to the fact that those extra dollars will flow into one sector or another at the whim of investors. This is an important point, as it also illustrates why efforts to re-inflate the U.S. housing-bubble are doomed to fail. The Wall Street oligarchs believe that by simply flooding the U.S. economy with new money/debt, and using its propaganda machine to relentlessly “pump” the U.S. housing market that it can restore previous valuations – and reverse the trillions in losses which they continue to hide on their books.

The reality is that all this newly created money/liquidity is certain to flow into scarce assets (like precious metals) and away from assets which are grossly over-supplied to markets (i.e. U.S. housing and U.S. debt). The only thing which could rekindle an appetite for U.S. debt is to bribe foreign investors with much higher interest rates.

U.S. propagandists will continue to insist that an appetite remains for U.S. Treasuries, a flow of foreign capital which the U.S. government depends upon to avoid national default and/or hyperinflation. However a steady stream of reports from other commentators indicate the U.S. government (and Federal Reserve) have been engaging in various forms of subterfuge to hide the fact that the U.S. is forced to “buy” much more of its own Treasuries than it admits to. Recent changes by the Treasury Department in how it reports its Treasuries auctions have become so convoluted that even pros who have been trading in these markets for decades admit they have no idea of who is really buying these Treasuries.