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What If
They Stop Buying Our Debt?
By Doug Hornig, Senior Editor,
Casey Research
“I have always depended on the kindness of
strangers,” said Blanche DuBois, in the final words of the play
A Streetcar Named Desire. Well, don’t we all.
Many citizens probably still cling to the
old saw that public debt doesn’t matter because “we owe it to
ourselves.” Wrong. Debt always matters. And as for whom we owe
it to, it is a lot of kind (or, at least, not yet unkind)
strangers.
As recently as 1970, foreign holders of
U.S. debt were essentially non-existent. But their slice of our
obligation pie has steadily increased, especially over the past
two decades, until now foreign governments and international
investors hold about 35% of Treasuries, as the following chart
reveals.
Of about $11 trillion in U.S. debt,
foreigners have about $3.8 trillion, with China in the lead at
nearly $1 trillion and Japan not far behind at around $750
billion.
Most likely, though, this trend has already leveled off.
The
Chinese, Japanese, Russians, and Indians have openly announced
their decision to cut back on further purchases and existing
holdings of U.S. government debt. Beyond that, the source of
funds previously allocated to their purchases -- trade surpluses
-- has declined sharply with the recession. As a consequence,
going forward, foreign buying is more apt to shrink than
increase.
While foreigners are continuing to show up
for the record-sized Treasury auctions, it’s due to the dollar
retaining its status (albeit shakily) as the world’s reserve
currency. But they have become quite cautious, generally
investing towards the front end of the yield curve, which is a
vote of no confidence in the buck’s future. As the chart
below illustrates, sales of long-term bonds to foreigners are
way down.
So what does all this mean?
It means that a big chunk of our
prosperity during the past twenty years was due to a trade
deficit that put billions of dollars into the hands of
foreigners, who then turned around and bought Treasuries with
them, helping the U.S. government finance its massive deficit
spending. That’s over -- and the unwinding process has just
begun.
Yet federal deficit spending, far from
reflecting this reality, has grown by leaps and bounds. But who
will finance it? Let’s extend our first chart out a few years.
As you can see, we project that foreign participation has
plateaued. U.S. private domestic investors can probably increase
their holdings moderately, now that households are consuming
less and saving more, and financial institutions have money to
invest in Treasury paper. The agencies and trusts (like Social
Security) are really not a part of the equation, but rather
reflect programs on “auto-pilot” and quickly headed to the point
where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of
assumptions, there are simply not enough buyers to cover the
accelerating federal deficits. That leaves the lender of last
resort, the Federal
Reserve, as the only remaining candidate to
satisfy the government’s grotesque appetite for funding. There
is no viable alternative.
The Fed will take up the slack in the only way open to it, by
printing money out of thin air and exchanging it for promises
from the Treasury. That means an escalation of monetary
inflation and, somewhere down the road, serious price inflation
as well. We don’t know exactly when that will happen, only that
it must.
The editors of The Casey Report have been alerting
subscribers to this very possible scenario for quite some time.
If foreigners stop buying U.S. government debt, the whole house
of cards will come crashing down. But if you would like to find
out what you can do to protect yourself financially.
click
here.
Has this article been helpful? We appreciate your feedback.
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