Soon There Won't Be Enough Money in the World to Fund US Debt

http://libertarian-neocon.blogspot.com/2012/11/soon-there-wont-be-enough-money-in.html ^ | libertarian neocon

[libertarian neocon]

I just started reading After America by Mark Steyn which I highly recommend to anyone.  It is probably the most humorous book on the economic apocalypse you'll ever read.  Anyway, Mark Steyn refers to a paper called "Financing US Debt:  Is There Enough Money in the World - and At What Cost?" by US Treasury official (and former Chief Economist of the Office of Management & Budget) John Kitchen and Menzie Chinn of the Robert M. La Follete School of Public Affairs at the University of Wisconsin.  Using estimates from the CBO, they calculate how much US Treasury debt foreign governments will have to buy over the coming years to keep funding our government at current interest rates.  The results are simply not pretty.  It is becoming increasingly evident that the US debt is just so enormous that we will eventually not have enough people around to actually buy our debt from us.  Check out this key chart:

As you can see, the way we are going, foreign ownership of US debt will have to be  over 20% of non-US world GDP by 2020!  The worst part about all this is that this figure was in the low single digits just a decade ago.  We are headed for a crisis and soon, probably in the next four years (though exactly when is unknown as nobody knows which level will be the tipping point).

Don't believe me?  I know one of my lefty friends likes to point out that things can't be so bad otherwise US debt wouldn't be trading at such a low yield right now.  As if complacency amongst the masses is a good justification to be complacent yourself.  I would just like to point out that Greek 10 year debt was trading at a 4.5% yield in August of 2009 and was trading at 29% just two and a half years later!  When things stop working, they can stop working very very quickly.

There just simply isn't enough money out there.  Just think about the graph above.  In a given year, about 20% of our debt has to be refinanced, so at 20% of world GDP, that means that foreign governments will have to expend 4% of their GDP every year just for us to roll over our debt!  Considering most governments account for 30-40% of GDP, we are talking about at least 10% of government budgets that would have to be allocated towards US Treasury purchases.  Why exactly would they do something like that?  Especially with such uber low interest rates on US debt?

The worst thing is that we are already seeing the largest foreign owner of our debt start to actually reduce their holdings.  China, who we seem to assume will constantly be willing to buy our debt because our economies are so linked, has actually reduced its holdings of our debt by $115 billion in the last year, that's a 9% reduction in just one year.  Without China providing incremental demand for our debt, where are we going to find additional buyers?  Remember, most of the larger economies are also struggling to pay off their social safety net promises and don't have the excess cash to spend on us, not in any meaningful way.

Like it or not, we are likely to see a combination of these three policies in the next few years by our government to deal with  the coming crisis:

1.  Money printing from the Federal Reserve, which has pretty much already begun.  In 2011, as part of QE2, the Federal Reserve bought a whopping 61% of US debt issuance in that year.  Eventually Brazilian type hyperinflation will be rearing its ugly head.  This will hurt the poor especially as they won't have any real property that will increase in value to counterbalance the across the board increase in expenses they will face.
2.  Interest rates on our debt will simply have to increase to attract more investors.  1, 2 and 3% yields will be a thing of the past as those aren't even close to attractive returns on investment.  Unfortunately, increasing yields will kill our real estate market (again) and balloon our deficit further as our interest expense burden will mushroom.
3.  Severe austerity will be forced on us.  If this austerity is tax heavy, expect it to kill the economy and not actually close the funding gap much, which is a phenomenon we've seen in Greece.  Eventually, even entitlements will have to be cut, but the longer we wait the less help it will do and more pain it will cause.

Most people have been thinking the problem will only come to a head in 20-30 years.  Based on the foreign holdings data, that crisis is coming very soon and unfortunately we have the very worst President possible to deal with that crisis.

[Tublecane]

“You can ALWAYS print more”

Tell that to Weimar Germany.

[knarf]

I'm really trying to get a handle on this.

If I borrow money that I can't re-pay and I borrow more (that I can't re-pay) to cover what I can't re-pay .. I eventually run out of money to borrow and get to the point of facing the leg-breakers.

(Sorry .. it's the best I can do)

And THEY say, "Give us our money or we break your legs"

Obviously I can't give any money so ... what? ... I get my legs broken?

And they leave me there to heal, but come back after re-hab and again say, "Give us our money or ... "

what? ... you'll kill me ?

OK .. they kill me ... my family has long ago fled THIS Joe MSZPKXFT (probably spelled wrongly), so there's no where to go.

OK .. I'm dead, the money's not paid and .. what now?

My house?

Worth aboth $300 on the open market ... piece of shit in the wrong part of town.

So, besides someone controlling my estate (America), what can happen?

See ... all this seems so futile.

[Lysander]

Since it is guaranteed that this kind of transaction will, and is, completely unraveling the worlds’ economies, businesses and soon the very lives of those who live upon the world, there are a whole lot of people who need to get a small clue...

Your summation was excellent. Right on spot!

[Oberon]

We should round up every single idiot that voted for obama and have them arrested!!!!! They are just as responsible for this debt as obama!!!!

Y'know... I really do hate to point this out, but it was 'W' who signed the first TARP bill.

I always side with the conservatives, but I'm not sure the GOP has any moral high ground on this particular issue.

[Tublecane]

So long as you have a central bank and legal tender you will fund your government through it. That’s a law of human nature. That was always the point of the Federal Reserve; well, that and bailing out Big Business when malinvestment leads to recession. It’s not that so far we’ve been borrowing and soon we’ll have to rely on inflation. Oh, no. Inflation’s done most of the work all along. Borrowing, and to a certain extent taxation itself, are PR to prevent the general public from freaking out and collapsing the monetary system.

[nascarnation]

Excellent post, and a lot of FReepers are out of date on this.
Bush was selling debt to China.
Baraq and Geithner just create it electronically.

[mo]

“If I borrow money that I can’t re-pay and I borrow more (that I can’t re-pay) to cover what I can’t re-pay ...”

Not to worry. In the 21st Century you don’t need to do this in person. that’s what your CongressCritter is for...on your behalf..and that of your grandkids...

[Tublecane]

It’d help to imagine yourself as a counterfeiter. A really good one whose product is indistinguishable from the real thing. So good, in fact, that your debtors will continue to accept your funny money until the real thing becomes so obviously overabundant as to be worthless.

[Tublecane]

Whoops, you are the debtors. I meant your lenders.

[Tublecane]

Bush was creating it electronically, too. We’ve been creating it electronically or with paper since 1913.

[Jim Noble]

Depends on what you mean by money.

From 1796 to 1912, the “money question” (what is it, who decides, and how are interest rates set) was one of the top three political issues in every election.

We have become so inured to the novel form of “money” that we use now that it seems normal, when it decidedly is not.

[knarf]

Still ... we're told we're headed for a financial cliff (here come d'leg breakers ), and SOMEwhere along the line, the game has to end and someone has to lose it.

OK .. I lose the game ... what was the purpose?

[GeronL]

They’ll just keep printing more. Heck they don’t even have to print it these days

[mo]

“...what was the purpose?”

To “prove” to the world capitalism “doesn’t work” and that for the “sake of the women, children, blacks and the poor” it must be banned. And only Marxism/Communism, which is “fair” will be allowed.

Any other questions?

[knarf]

And the percentage of people wanting to "prove" are what? ...

.000000001 % of the population?

I guess I'm leading up to ... without getting banned from FreeRepublic to stating ... I'm pretty sure I won't allow anyone to do that to me.

Read into that what you will.

No one wants to say words that we swore we'd say IF the election went the wrong way.

Helloooo ...

McFlyyyyy ....

[Terry Mross]

Isn’t it scary that people who think like little children can vote?

Kid: “Daddy, can I get a new bike?”

Daddy: “I don’t have the money right now.”

Kid: “Write a check.”

[Gandalf_The_Gray]

unfortunately we have the very worst President possible to deal with that crisis

It is not his intention to "deal with that crisis", he is fully aware of what he is doing as he heads for the precipice with his foot flat out on the gas. It is his intention to destroy our economy. I base that assumption on his performance to date, there is no other explanation.

Regards,
GtG

[dscott8186]

Digi-dollars, absolutely correct, The audit of the Federal Reserve books showed it leant out $16 trillion over a 3 year period to foreign and domestic banks. This amount, greater than the entire accumulated national debt at the time.

No money was printed, they wired electronic ones and zeros. The greatest financial fraud in history occurred and no one noticed.

[libertarian neocon]

“It is not his intention to “deal with that crisis”, he is fully aware of what he is doing as he heads for the precipice with his foot flat out on the gas.”

I agree. Unlike some, I will not ever consider him to be my President.

[mo]

in case you were wondering exactly who they are...and what their plans for you and I really are...

“I want you to imagine sitting in a room with 25 people, most of which have graduate degrees, from Columbia and other well-known educational centers, and hear them figuring out the logistics for the elimination of 25 million people.

And they were dead serious.”

http://littlegreenfootballs.com/article/31662_Bill_Ayers_Terrorist_Group_Discussed_Genocide_of_Americans