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.

[rovenstinez]

Well, if they can’t print it, I suppose they could just add a few zeros onto the EBT transfer cards. Computuer programs that are running on tetrabytes will just have to make a few more zeros. No one is fooling anyone, we just know the value of a zero.

[onyx]

We sure need some here.
FReepathon Day 50!

[PGR88]

There ALREADY isn’t enough money in the world to fund US Debt. The Federal Reserve has to buy (ie. print) 70+% of US Debt issuance now.

try to imagine where interest rates would go if the FED did not buy US Debt.

That is why the Federal Reserve is the first and most important pillar of Progressive plans for Government. No FED means no money printing, which means the Gov’t must pay real interest rates on debt, which means Gov’t spending would be eventually be checked by the market, which means the Gov’t would not be able to run massive, long-term deficits as they are now, which means they can’t fund the welfare state.

[Arpege92]

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!!!!

[Rightly Biased]

Obama’s America.
He promised to foundationaly change America.

[cableguymn]

You can ALWAYS print more.

Prices will be adjusted accordingly.

Maybe Zero can get his mug on the new 100,000 dollar bill? You know the one you will need for a loaf of wonder bread..

oh wait..

Bimbo bread.

[rurgan]

Every day we get more laws, more government , more debt. That is incremental socialism and that doesn't work.

They even banned 100 watt lightbulbs are are forcing us to buy mercury laden curly bulbs , banned big sodas, and a million other freedom robbing laws. They banned light bulbs because of decades of fake government funded research on the hoax called global warming. this alone proves socialism doesn't work that they have funded trillions of $ of global warming research. Oh so we now see there is no global warming so they rename it to climate change.

This country became great because it was the freest and had the most limited government.

A vote for democrats is a vote for tyranny, slavery, and economic failure.

[cableguymn]

eff that.

Round um up and put um to work! They have a huge tab to pay off. My kids sure as he77 don’t want to pay it off for um!

[jessduntno]

“try to imagine where interest rates would go if the FED did not buy US Debt.”

No need to imagine it. It’s happening. Gold will skyrocket, the economy will flatline, inflation will eat us and the housing market (most common source of wealth for the middle class) will stay underwater until interest rates are forced up...then we will have what is already what we have if there were rational thinking...a double dip.

[Responsibility2nd]

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

 

Nonsense. Just print up a butt-load of these...

Problem solved.
 

[KoRn]

Of course there will be “enough money”!

Bernanke can pull up the necessary app on his workstation, and create as much ‘money’ as he wants to. Now, if the ‘money’ had to be converted to hard cash for any reason, that could be a problem as there wouldn’t be enough physical capacity to print it all in a timely matter. Hell, we’d probably run out of trees/cotton right now if we tried paying off our national debt in cash. Our creditors will just have to accept our binary ‘digi-dollars’, or wait awhile.

[showme_the_Glory]

I can’t be overdrawn, I still have checks?

[Nervous Tick]

>> There just simply isn’t enough money out there... foreign governments will have to expend 4% of their GDP every year just for us to roll over our debt!

If they fail us, America’s Sugar Daddy Ben Bernanke has an ENDLESS appetite for treasuries.

[ez]

Perhaps he’ll coin a new denomination and call it Obama Bucks. One Obama Buck will be equal to $100,000 US dollars.

[veracious]

Mostly correct.

However, this article like many, about sovereign debt, misses the main point. The main point is that USA and other nations no longer plan to borrow money from any known source. They plan to, if fact have started years ago, borrow money-out-of-thin-air (MOOTA). That's right, when they want more money they just call up their pseudo-national bank and request a loan. Their pseudo-national banker says fine&dandy and pulls up their exclusive money transferring screen wherein they transfer the requested _money_ TO the government (GOV), FROM nowhere! They most assuredly record this transaction as a debt owed by GOV, in their spreadsheet.

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...

[Arpege92]

“Round um up and put um to work!”

lol liberals working...such an oxymoron!

[Skepolitic]

“Soon There Won’t Be Enough Money in the World to Fund US Debt”

Ha! The amount of money that the Bernank can create is limited only by the number supply.

QE-ternity can expand the money supply to infinity and beyond.

[Blood of Tyrants]

As others are saying, the Fed will just print more money and “buy” T-bills.

[Tublecane]

“which means Gov’t spending would be eventually be checked by the market”

It will be, anyway. The market, like murder, will out.