Pages

Tuesday, March 14, 2017

US National Debt Clock As We Approach the End of the Debt Ceiling Holiday

Wednesday (3-15-17) the debt ceiling holiday ends. We have become so numb to the enormous US debt figure now that most of us just don't even think about it anymore. But just to check in on reality every now and then I have added a link to the National Debt Clock web page to the list of information links on the right hand side of this blog. 


How this problem will ever be resolved in a non disruptive way is quite the mystery. So far, the US can still borrow all the money it wants. If no one else wants US treasury bonds the Federal Reserve can just create money out of thin air and buy them as they have done by the trillions already. When something like this goes on and on for years with no apparent consequences, it eventually seems like it can go on forever. You actually ask yourself questions like:

Why can't the Fed just create the money to endlessly buy US debt forever whenever we need it if no one else will buy it?

No one seems to care how much of that they do and the US dollar seems to do continue to be just fine no matter how many dollars are conjured up out of thin air that no one did any actual work to earn. It truly is somewhat like having an officially sanctioned counterfeiting operation that no one ever questions (because they all know doing so would raise the systemic risk through the roof and everyone using the US dollar would likely lose).

But somewhere down deep inside, we know this will not continue forever. As I write this article (3-2-17) every US taxpayer already has an obligation for over $166,000 of US debt (per the debt clock stats). If we add in future unfunded entitlement liabilities that obligation jumps to over $878,000 per taxpayer. There are just barely enough "total national assets" per the debt clock to cover all that obligation. And all it will take is one good stock market correction or economic recession to drop "total national assets" below the total current and future debt obligations. Not to mention that rising interest rates will make the problem even worse (will add to the interest payable on the debt).

It is obvious by now that no one knows how much longer this will go on. It has already gone on longer than many experts and analysts ever imagined possible. President Trump says he will grow his way out of the problem, but that is far from a certainty even if his policies work as planned (and if Congress actually implements them first). Also, it is pretty clear he plans on piling up plenty more debt for as far as we can see into the future right now since even his growth projection takes time to kick in.

As we noted above, so long as no one cares if we just create whatever money we need at the Fed to buy US bonds if no else will, things can just keep right on trucking along. What fun it is to have the world reserve currency that everyone needs and has to use until and unless something changes things.

Unfortunately, when the day does arrive where that won't work any longer, we will very likely have to live through the kind of dollar crisis that Jim Rickards and others have long predicted. Will that happen this year, in ten years, or even in my remaining expected lifetime (age 61)? I don't know, but it will eventually happen. And we will very likely see major monetary system changes at that time. Whether I will be here to cover it is another question.


Added note: Want a visual aid that illustrates how much global debt is out there? Try this. Also of interest is the US dollar to gold and US dollar to silver ratios in the lower right hand corner of the debt clock web page. Note the comparison to 1913. How does the US debt to GDP ratio compare to other major nations? Go here.

Added note 3-16-17: As expected, nothing of importance happened as the debt ceiling expired. David Stockman says it will be early summer, but most observers don't expect anything different this time after some usual drama.


Reader comment on this article:

Here is a great reader comment I got on this article. The reader prefers to remain anonymous:

Hi Larry;

"Just read you most recent post, after I had finished a Robert Shiller article.  He mentioned something I hadn’t known about the 17th Century tulip mania in the Netherlands, when a rare tulip was worth as much ( albeit briefly ) as a house.  What made that well known fact even more surprising was the concurrent phenomenon of a renewed outbreak of the Plague in Holland, as well as continental Europe, so that the “demand for houses” or for that matter anything else except tombstones, was about to fall dramatically, what we would today call demand based deflation.

I think that second event makes the tulip mania seem even more strange in retrospect.  With respect to the dollar and US debt, ( a dollar is, after all, a zero coupon perpetual bond ) what matters is WHO accepts it in settlement of trade, whether for goods and services, or for financial assets.  It is my personal opinion that  we are in a transition phase in the history of dollar “backing”.  The first was the gold exchange standard, which ended officially in 1971, but which was not “replaced” until late 1974, when Treasury Secretary William Simon obtained agreement from King Faisal that all oil would be settled in dollars ( the petrodollar standard ).  Today, less and less oil is being settled in dollars, as the U.S. becomes a smaller import market, while China and Europe import more oil ( and especially nat gas ). 


As we move away from the “petro dollar standard", what replacement candidate is there for dollar backing?  I would suggest that it is the financial securities markets of the US themselves which are now carrying that load.  States accumulate wealth via “reserves” of their central banks, and via their sovereign wealth funds (SWF's).  Both of these invest in debt securities, but both also invest in stocks, though the stocks proportion is greater for the SWF’s than for the CB’s generally.  A strong dollar flatters these investments, as does a rising securities market, while at the same time, reserve currency status “generally” leads to reserve currency strength.  Taken all together, this looks like a one way street, except that it relies on “price remaining no object” , just as on the 17th century.  Just exactly WHAT event will trigger the moment when “the price seems just too dear” is one which I reserve for my paid subscription clients only ( ha ha )

Meanwhile, watchful waiting is the order of the day."

No comments:

Post a Comment