A Dollar Crisis in the Making

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21

Let me reiterate my position: “My conclusion from all this is that the US has a date with a funding crisis and probably an associated dollar crisis, and increasing foreign indebtedness is an absolutely vital component of that pair of risks.”
I think I see things backwards from a few others here.  I don’t see a dollar crisis as a cause, but as an effect.

I am convinced the US has a date with a funding crisis.  Full stop.  Discuss.

Next, I cannot conceive of how a funding crisis can be resolved without an associated currency crisis.  They go hand-in-hand like Argentina in 2001 or Mexico in 1984 or… etc., etc., etc.

Timing?  Here I really have no particular position on the short or even intermediate term direction of the dollar or any other currency because they are all manipulated to an incredible degree by central banks.  This is not idle speculation, they write papers about how to do it best and post them to the BIS website.  I’ve read them.

The issue for me comes down to merely trying to assess when the strain of propping the current US fiscal nightmare grows too large for the other central banks.

My hypothesis is that such a break will happen like a pencil snapping - all at once and rather suddenly.  Right now I view the pencil as heavily strained and flexed but obviously not yet broken.  3% ten year yields and 0.24% 6-month yields tell us that the US government is not yet out of borrowing room.

But is the US insolvent?  Yes.  Is the US government borrowing at unsustainable levels?  Yes.  Will the US government willingly stop borrowing too much money on its own?  No.  Does the US government therefore have a date with a funding crisis?  Yes.  Is the chance of an attendant dollar crisis high or low?  High.  Very, very high.

 

22

Dr. M,
Thank you for all your research and for reiterating your conclusions.  I understand what you are saying and understand the research.

However, I see some big differences between the dollar and the Argentine and Mexican Pesos.  Holders of those countries’ currencies could not use  them for anything other than to buy Mexican or Argentine products.  When each of those governments decided to print their way out of their funding crisis, foreigners naturally dumped the currencies, noting that the only things they could buy with them, namely products from each of those countries, would hyperinflate - making whatever amount of the currency they were holding worth less.  The flood of each currency re-entering each country created a double-whammy hyperinflationary effect - adding to what the government was already printing.

In contrast, the US dollar is not just accepted in the US.  It is the world’s currency and is accepted everywhere.  It is also the currency in which the vast majority of debt - both public and private, is denominated - debt that is getting ever more difficult to pay as the global economy and the outflow of dollars from the US has slowed to a trickle.  They can be used to pay off debt, which is not a choice - debt must be paid off, so demand for dollars must exist at least until debt is paid off.  Besides debt, dollars can be used to purchase any commodity from any country, including oil.  Thus, despite the Fed/Treasury money creating binge, those dollars are still finding “homes” other than US goods and services which are still not rising in price.  Debt is still payable in dollars, and dollars are still accepted everywhere.

I fully agree the dollar is toast long-term.  Before there is a currency crisis, however, and in my humble opinion, we should see creditors (both public and private) demand some other form of payment other than dollars, and start seeing commodities start trading in something other than dollars.  Until then, our situation is really far different from that seen in Argentina, Mexico, and other self-inflicted victims of hyperinflation, because our currency is not good just here at home - it is good throughout the world.  They did not have the incredible advantage of being world reserve currrencies.  Right now, it is hard to imagine anyone demanding another form of payment other than dollars.  China is trying to get others to accept their Yuan, but who in their right mind would prefer Yuan to dollars?  Even with all our profligacy, other countries currencies are perceived to be even worse. 

Anyway, just my two cents and me trusting myself.  Thanks again for all your work.

23

[quote=cmartenson]
Let me reiterate my position: “My conclusion from all this is that the US has a date with a funding crisis and probably an associated dollar crisis, and increasing foreign indebtedness is an absolutely vital component of that pair of risks.”

I think I see things backwards from others here.  I don’t see a dollar crisis as a cause, but as an effect.

I am convinced the US has a date with a funding crisis.  Full stop.  Discuss.

Next, I cannot conceive of how a funding crisis can be resolved without an associated currency crisis.  They go hand-in-hand like Argentina in 2001 or Mexico in 1984 or… etc., etc., etc.

Timing?  Here I really have no particular position on the short or even intermediate term direction of the dollar or any other currency because they are all manipulated to an incredible degree by central banks.  This is not idle speculation, they write papers about how to do it best and post them to the BIS website.  I’ve read them.

The issue for me comes down to merely trying to assess when the strain of propping the current US fiscal nightmare grows too large for the other central banks.

My hypothesis is that such a break will happen like a pencil snapping - all at once and rather suddenly.  Right now I view the pencil as heavily strained and flexed but obviously not yet broken.  3% ten year yields and 0.24% 6-month yields tell us that the US government is not yet out of borrowing room.

But is the US insolvent?  Yes.  Is the US government borrowing at unsustainable levels?  Yes.  Will the US government willingly stop borrowing too much money on its own?  No.  Does the US government therefore have a date with a funding crisis?  Yes.  Is the chance of an attendant dollar crisis high or low?  High.  Very, very high.[/quote]

I thought your report above was a 9.98 our of 10. This snippet is a 20! (On a scale of 1-10)

24

Chris,
Are you increasing your holding of PM’s due to this observation? 

Historically I’ve read where one needs to keep around 5% to 15% of one’s wealth in PM’s.  If we indeed are headed for a currency crisis, would you recommend that percentage increase to 30% - 50% or some other percentage?

 

25

FB,
My simple mind just does not fully understand your hypothesis on the dollar.  Please bear with me.  When you say debt denominated in dollars, what kind of debt ?  Major construction projects?  Sovereign debt?  Local demand deposits?  Is this debt long or short in duration?

Also, when you say “that the outflow of dollars from the US has slowed,” how does that happen/work?  And isnt that trend reversible in the blink of an eye?  When you buy a t-bill, you can get dollars in 3 months, no?

You have a very good point that even though the US is acting in a very untrustworthy manner, other countries have even built up less “trust capital,” amazing that the US has defaulted twice in history and still maintains that trust.

 

 

26

Good observations, FB. Some thoughts.
FB wrote: “Right now, it is hard to imagine anyone demanding another form of payment other than dollars.”

Well, that may be our problem right there: a lack of imagination. That something is hard to imagine is not in and of itself an argument – as I’m sure you well know, FB, nor is it a true barometer of actual likelihood. Most events of the past eighteen months were hard to imagine eighteen months ago.

FB wrote: “China is trying to get others to accept their Yuan, but who in their right mind would prefer Yuan to dollars?  Even with all our profligacy, other countries currencies are perceived to be even worse.”

Again this is an area of relative perception. Meaning, are the “other” currencies actually worse or just “perceived” to be by a world stuck in an old paradigm (I noticed you used this caveat here, so maybe even in your own mind you’re questioning this statement). I would think because of the inevitability of the US’ financial situation that any country who is a creditor and has a decent manufacturing base would be more appealing – though in the end there’ll probably be a new reserve basket of currencies. Isn’t it dangerous and inflexible only having one in the first place anyway?

As far as debt and deleveraging go and the dollar holding up until dollar-denominated debt is taken care of, doesn’t this presuppose that said debt will/can actually be paid off? It seems to me that most of this debt will not be paid off (mathematically can’t be in many cases), perhaps positioning us closer to a final deleveraging than you think. The phrase “cutting your losses” is seeming as apropos as ever these days.

A contrarian view I hold is that the threat of the US military and economic sanctions/blackmail levied through proxy organizations such as the UN, World Bank, and IMF is as much reason for the dollar’s strength as any so-called market fundamental.

I also think a view that I see some hold that is terribly misleading – though admittedly not much here – is this black and white idea of a dollar crash being bad and a propped up dollar being good. Whether the dollar collapses or not the average American is up the creek. And whether it’s deflation or inflation, the average American is still up the creek. Why? Well, because much of these discussions are theoretical – albeit with some real-world translation – and very relative. So for example, deflation or a strong dollar doesn’t help out Joe Average if he’s still making what he made when milk cost $1.50/gallon or if he’s unemployed. Deflationists often jump into the mode of, “Well, now that my dollar buys more…”

Most of these discussions also do not take into account scarcity or pricing forces driven on the supply end – they tend to assume most things to be plastic widgets of which there are an infintie amount. So, as I’ve said before, we could be stuck in a world that screams theoretical deflation while all around everything we really need is skyrocketing in price – energy, food, petroleum-products (say, like asphalt roofing materials, etc.).

 

 

27

Plantguy:  When I refer to ex-US public/private debt, I am referring to any private or public debt denominated in dollars.  Do you ever read a financial headline announcing a corporate merger or acquisition in a currency other than dollars?  Yes, there are some in Euros, but for the most part they are in dollars. 
Commodities purchasers borrow the capital they need to secure futures contracts in dollars, and commodity suppliers borrow dollars for further exploration and exploitation of resources. 

Countries lend to each other in dollars. IMF and the IDB make billions of $ worth of loans to developing countries- in dollars.

Private parties price and demand payment in dollars in many non-US dollar currency nations.  In my country (Costa Rica), for instance, all major and many minor contracts are priced in dollars.  My cable-tv bill is quoted in dollars for example.  Colones are accepted, but the price quoted is in dollars and they are immediately converted to dollars by those receiving them.  Speaking of CR, we took on a $300 million loan from China just a few years ago - even the Chinese must lend in dollars! 

Granted, these are all anectodal examples, and I wish I had the data mining skills of Dr. M to back all this up, but everything I see seems to point to quite a bit of dollar-denominated debt out there. 

What about the empty skyscrapers in Dubai, and all over China?  Who financed them?  In what currency?  What about the major infrastructure projects in Europe?  I was recently in Madrid’s airport and for a moment I thought I was in the Taj Majal.  The display of excess and luxury was overwhelming.  Maybe the bonds used to finance that debt is in Euros, who knows.

 

Maine Coon:  You are absolutely right in that my arguments are based on mental exercises of logic (or lack thereof!).  I do not have any data, just my perception of what is going on, and I do not pretend otherwise. 

When I say it is hard to imagine anyone accepting Yuan it is because the only thing you can buy with Yuan are Chinese goods and services.  Accepting Yuan for payment is akin to partnering with a non-transparent government that despite its recent succeses, still censors freedom of speech, does not allow true property ownership, and runs a state-mandated economy.  Now I fully admit the US puts on a facade of transparency, and has no doubt been manipulating the markets and its reporting of its economy for decades.  However, the world “knows” the American and the US.  There is an inherent trust there that, while possibly undeserved at this point, will take some more time to tarnish and decay.  More importantly, the dollar is accepted everywhere.  It is the bully in the world pond, and the odds are heavilly stacked against any other currency taking its place.

The other currencies are worse.  China is printing Yuan the same way it pumps out $1 toys.  All currencies are derivatives of the dollar.  Again, it may not be fair, and we certainly do not deserve the cushion the coattails of our currency status have afforded us, but that is the way things still stand up to now, and until dollar-debt is extinguished, I so not see demand for dollars decreasing.

28

Perhaps I spoke too soon with my inquiry about gold. It does seem to be making a move higher over the last 24 hours. Given the content of this thread, and  Mish’s latest post:

So What's Behind Moves In Gold?

(and favorable sentiment indications), perhaps its time to add to my gold allocation, something I haven't done for several months. I have been waiting for another de-leveraging (crash) event to increase my PM allocation, but I'm starting to think that might be a ways off. And besides, dealer premiums are relatively low now.

Still, the current price is very hard to swallow.

 

29

Farmer Brown,
I do really appreciate your postings!  It is so nice to see discussions between you and Maincooncat. 

I think you hit something when you talk about “an inherent trust” in the US by the world in comparison to non-transparent Chinese government.  I think the US is getting extra extra credit than it deserves right now from many good deeds done by the previous generation of Americans such as defeating nazi Germany and imperial Japan, thereby liberating so many people around the world and then rebuilding Europe and Japan.    The way I see now, it seems this country has been hijacked by an oligarchy and the Wall Street…  I hope this county can reclaim some of the best it has shown to the world previously.

30

Gold doesn’t go up or down. Gold is a store of value. So was the dollar. The gold I purchased in 2002 can buy as much then as it can today. The dollars I saved from 2002 can’t. 

Store of value.

 

31

I really like to see these reporst taht show what is behind all the reported numbers. And this brings up a question that has me perplexed: Is it possible to see who has been buying into the stock market over the past few months? Are there statistics on large vs. small buys, institutional vs private, etc. I just find it hard to believe such a rapid rise can happen with no obvious bubble to push it up. It’s not like there is something out there that this motivating people like a new technology or rising construction. So who is buying?

32

I agree we are heading toward a funding crisis.  Simplistically, we have two choices to “entice” people to buy our debt:  1. Let interest rates rise or 2. let the dollar devalue.  The Fed. has already stated they want to keep rates low and for good reason.  All future debt (ie mortgages, car loans ) are set based on current interest rates.  If rates are allowed to rise, the socalled “rebound” in home sales could slow or stop if mortgage rates get back over 6% .  So in my mind the only thing we can do is to let the dollar devalue so our debt is a little more attractive than the rates would suggest.  The problem, as I see it,  as the markets are selling off around the globe this week, the dollar is strengthening - and our treasury rates are dropping. 

The US dollar is perceived as a “safe” investment.  But for how long? Like I said before, out of all of the worlds Fiat currencies, it is perceived as the best looking horse in the glue factory.  If the dollar continues to strengthen and rates continue to drop, the funding crisis may be  closer than any of us would guess.  A low interest rate and a higher dollar does not entice foreign money to buy our debt. 

I know there are a lot of variables, but in my simple mind, these are the main points but I think I am missing something…?

33

STRABES:
Just to be precise…it’s not “our country”…it’s “the powers behind the central banks” (just look at CM’s data…this stuff is being done by banks or their stooges like Geithner, not governments)…though when history is written, the country and some politicians will be blamed, just like Hitler and the Nazis were after the global bankers destroyed Weimar (must add the obligatory footnote:  Hitler was horrific, as the polish jewish side of my ancestral family was exterminated, so I’m not saying he was unfairly blamed…I’m just saying the disaster from which Hitler emerged was setup by financiers a decade or so prior)

I would like to know more about this. Can you recommend any books, articles or resources?

34

It’s…uh…well…let’s say…dissapointing to see references to the U.S. as having a reserve of “trust” in the worldwide community.  I can only say that those who are claiming that the U.S. still has some elevated status as a country worthy of admiration and emulation–and  as a place to put one’s Actually-earned wages–seem to have spent not a minute with any of those People  that are presumed to hold such opinions.
The average citizen in Asia is fully ready to “burn the exploitative capitalist dogs.” It’s the governments (Asian) who understand ‘The Art of War’ (they invented it) and how the “wretched enemy” will be decapitated.  Thus, the “quiet” reorganization of the Asian Industrial Machine; something that has an innate speed limit; one which is painfully slow for an internet-enlightened Asian population that understands–FAR TOO WELL–the exploitation that has been visited upon them by a corrupt American Oligarchy, aka, Goldman Sachs and its subsidiary, the legislative and “executive” branches of the New Third World.

A little information for the America bound (as in those who wouldn’t even know where to go to get a passport):

  •  
    • Asians make houses out of bricks and concrete; Americans make houses out of sticks out in the sticks.
    • Asian high school students spend 12 to 18 hours a day studying; American students attend classes--some of the time.
    • Asian parents think the greatest responsibility of a parent is to focus all available time, energy, and finances on their children's education; American parents can't wait until their kids turn eighteen, as they can legally kick them out of the house at that age.
    • Asian families are often three or more generations deep at all times during a child's upbringing, which means that there is, by definition, an inescapable love of family that any child must reasonably respond to by doing the absolute best he or she can do in every way; American kids have keys to get in the house when they get home.
    • Asians  have dreams of contributing to the wealth of their nations; Americans have delusions of wealth and a wealth of delusions.
Of course, I generalize. But  that is why statistics was invented; i.e., to declare when "Values" are so far removed from the Average that they can be considered "Outliers" and, thus, unworthy of consideration...
35

Headless-
 

You bring up some very good points, but they seem to relate to family values rather than the Yuan vs the Dollar.  I could not agree with you more about the work ethic, schooling and such, but it does not address why people “currently” still invest back into the dollar when a “downturn” in the markets occur.  The current market sell off strengthened the dollar against a lot of major currencies.  I do not understand nor agree with it, but it is still the perceived “safe” currency and still the reserve currency of the world.  I do not believe for very long.  The world and most importantly China is pulling away from us, via contracts with other countries for trade in non-us dollars.  But overall, most of the worlds trade is still in US dollars.  Help me understand your point, because your first sentence is very  condescending.  Your points state that China is better organized, schooled and has better houses than the US, so we are going to be using Chinas currency soon?

36

memorrison,
My apologies for the first sentence “seeming” (it was) condescending: I have been in these conversations about the way the world perceives the U.S. with so many people that have never been out of the U.S. that I don’t have anything left but ire for that type of encounter.

I understand that I don’t know some things, I understand that there are things I don’t know that I  don’t know, and I know that I am guilty of representing Twain’s maxim with inimitable stupidity: “…what you know for sure that just ain’t so…”; thus, I actually do try to stay within the boundaries of my experience so that I don’t waste people’s time, look stupid, and get angry at myself.

To the  point–my point that bounced off of the point of the conversation here: Those people who have bought the sanitized story about the U.S. as a force for good in the world–especially those that don’t have passports–Are The Problem!

What?

Well, when is a problem generally addressed? Well, depending on a, b, and … sometime after it becomes one; not before. We are in serious need of one of those five-stages-of-grief processes here in America (to address the problem), yet we can’t get past denial because we don’t know what we don’t know, and what “we” know “just ain’t so…” ; and to say we “have no interest” in knowing would be like saying we have no interest in denying the existence of the “Celestial Teapot”; that is to say, we (Americans, in general) aren’t even aware that there is something to deny; thus there really is no culpability  on the part of the average MSM-cocooned  U.S. citizen; no way to say: “Hey! You should be apologizing for the sins of your fathers because humble is the only thing that will save you from a forward-marching world of hard-working people (Asians) that have come to perceive you as fat, lazy, dumb, and pampered by virtue of having a corporo-government that has been out sacking the rest of the world  for the last 100 years and is only ramping up its efforts as of late. Yes, be humble, and we will show some lenience in the sentencing phase of the trial…”

The problem is, in contrast to the Celestial Teapot,  there is something to deny (in the 5-stages sense), and we need to get busy denying now so that we can get started on the other four stages of the process and move on to assemble the New American Paradigm that replaces the old one of World-Wide Exploitation.

The Dollar: Picture an Asian (graying Japanese gentleman, for example)  that works in a factory building widgets for export to the world. Imagine him watching the nightly news while his son, who is studying to be a diplomat and who is headed toward the best university in Tokyo next semester, is dutifully studying in the small bedroom that he shares with his sister; a sister who is also studying , but in her case, to be a banker. The man  has recently been warned that if exports fall more than X-percent this year, the company will have to lay off a portion of the employees; he is one of them.

As he watches the nightly news, the anchor explains that exports are down X+ percent due to the losses various countries are suffering as a result of investing in toxic American financial products. The man realizes he will lose his job and will not be able to support  the educational efforts of his children as is the duty of every good parent–unless…

The children (high schoolers) are diligently studying in the quiet apartment. The man turns off the television and softly crosses the room and opens an ancient wooden chest that has been passed down through the family since the beginning of the Tokagawa Period; it is charred on one end from the fire bombing of Tokyo in World War II. He kneels before the chest and slowly lifts the top, softly leaning it against the wall behind. From within the chest, the man removes a red pad which he placed there some few nights before (“So that it will not be as horrific in appearance…”). He then reaches in and removes an item that will only ever be used once: a knife with which he will perform Seppuku, thus “doing the honorable thing.”

He reaches in again and slowly, with a solemn look of shame, almost cowering, lifts an old black-and-white photo that has no frame; it is rigid and yellowed with age, but it is not damaged. He apologetically, eyes to the floor, thanks the man and woman who are in the photo; an expressionless couple who stand beside each other in traditional dress below a blossoming cherry tree. He apologizes for his failure, for the efforts that they made–with hope–on his behalf. He gently returns the photo to  the chest without looking up at it, closes the chest, stands up with the knife in one hand the red mat loosely hanging from the other, and walks to the center of the dimly lit living room, where he carefully places the mat, kneels, holds the knife before him with elbows wide, and draws the knife from its diminutive scabbard…

His children have fallen asleep studying; they are awakened the next morning by the sobbing of their mother…

They go on to become a diplomat and a banker…

This is a bit of theatre, melodrama. But the emotions that the children experienced in this story is a fair representation of what children who are truly loved are feeling when they see their loving parents suffer the injustices inflicted by a “a government of criminals” half a world away.

My point: The dollar lives by perception; it is dying by perception now. Just because the average American has no knowledge of the shift in perception that is occurring, doesn’t mean it is not  occurring. Every day more Asians with a very different perception of American “integrity” are entering the workforce and key positions in government, etc…

The dollar is beginning to be equated with a Hara Kiri knife…

 

37
cmartenson wrote:
P.S. Where is Japan getting all that money from to buy US Treasuries?  Not from thin air, one hopes!
Could the run up be partially explained by Japan's currency carry trade?

The BOJ has been running zero interest rates in Japan for around 10 years.  Big players (central banks, hedge funds, insurance companies, etc) were borrowing Yen at 0% and then buying US treasuries at about 3%, for a net gain of 3%.  Free money, not a bad deal.

This theory makes sense, at least until Oct 08 when China stopped the carry trade by buying lot’s of Yen.  But it looks like the run-up continued after that period so that kinda pokes a hole in my theory.

joemanc wrote:

I’ll be darned if I can find it, but I thought I had read the other day in one of the U.K. papers that the new government in Japan wanted to reduce it’s investments in the U.S. I wonder if the story has been “misplaced”.

You're right, FXstreet.com for one, has an article "Japan: Major political change coming in Japan" -
DPJ may buy less US bonds and boost relations with Asia

The leader of the DPJ party has said that if he is elected (he won) Japan would no longer look to buy US denominated bonds and would only buy JPY nominated bonds.  The Japanese election could have significant impact on the financing of the US budget deficit as Japans current government is a major buyer of US bonds.  The DPJ party leader has expressed concern about what he labels US “unilateralism.”  The election change may also mean that Japan would be less supportive of USD reserve status.  70% of Japanese currency reserves are reported to be held in USD.

It’s not clear that the DPJ pledge to boycott US bonds will come to pass or is practical. The new Japanese government will not want to undermine its large holding of USD with any significant shift out of the USD. This is particularly true because there are limited reserve currency alternatives to the USD. The DPJ party also plans to shift focus away from trade relations with the US and seek to build relations within Asia. Expanding trade with the Asian block is likely to be a positive for Japan’s economic outlook and it’s unlikely that US Japanese relations would deteriorate because of an effort Japan to expand export trade with Asia. China recently became Japans leading trading partner.

Larry
38

Chris;
I also take exception to the statement that the US doesn’t need foreigners to finance the US fiscal deficit.

First, its not just about the deficit, its the debt (stupid). Here’s my arthmetic…

The federal fiscal deficit this year is projected to be $1.8 trillion. The total government debt (the cumulative effect of annual deficits) is projected to hit $12.9 trillion this year (whitehouse.gov estimate). This means that it’s just not this year’s deficit that needs to be financed, its the whole debt.

As you point out, this year’s estimated personal savings rate for the US = $403 billion. Clearly, even if all the personal savings of every American when towards financing this year’s deficit, there is a shortfall of more than $1.2 trillion this year.

And what about the debt? Total on deposit of all 8200+ FDIC-insured US Banks (Q1-09) = $13.4 trillion. In other words, just to finance US federal government debt would require nearly every dollar currently on deposit in US banks. Then there is total credit market debt which including the total federal government budget deficit equaled $52.9 trillion in Q1-09. (This has grown 35% faster than the GDP since 2000 and now represents 375% of total annual US GDP).

Now add future unfunded liabilities to the equation which is another $59 trillion. (usdebtclock.org) (Let’s put aside for a moment that future liabilities aren’t due today)…

Here are the totals per US household (115 million). Oh, and there is also the interest on the debt (let’s assume 3.5% per year which is the approx. 10-year T bill yield which works out to an additional $450 billion/year)… To put these numbers in perspective, this is what it works out per US household.

TCMD of $53 trillion = $461,000 per household.

Medicare, Social Security liabilities $59 T = $513,000/household.

Grand total per household = $974,000.

I’d love to see how the Pollyanna prognosticators can explain how the US can finance its own current debt and how will we’ll finance our future liabilities without help from foreigners?

And while they’re at it could they also explain how we’ll fill the $1 trillion gap that foreigners have invested in US Treasuries in the last 18 months as Net Treasury international capital flows reverse? I have been tracking TIC flows since 2005 and the results aren’t pretty…  (See Chart 2 at http://tradesystemguru.com/content/view/286/58/)

Thanks…

Matt Blackman Host TradeSystemGuru.com

39

Is that really correct?  The existing debt has already been financed.  Prior year’s bonds maturing presently do have to be rolled over into new financing, but I do not believe it is accurate to say the “whole debt” needs to be refinanced.

That may become true in a few years when we have transferred all our debt to the short end of the curve and foreigners refuse to buy anything than 1-yr bills.  I think that’s where England is right now (90% of their debt is due by Christmas).

40

I think its important to keep one’s eye on the big picture. The whole debt needs to be continually refinanced and the exact amount each year depends on the maturity of bonds being financed. But it is the debt, not the deficit that is the problem!
In examining US Treasury international capital flows (line 30), there is a clear trend toward increasing redemptions and falling new investment. At the end of the day, its to debt we need to worry about not the deficit. If confidence falls in either the dollar or the ability of the US to make good on its debt payments, redemptions will skyrocket which will require that we find new buyers for those bonds sold as well as for the new ones being issued.

MY math was designed to highlight the fact that with all out debt obligations, both present and future, there is no way personal savings can finance total obligations nearing $1million/household (and growing rapidly). 

There is also the interest payments on the total debt that needs to be considered. Let’s forget the concern for a moment about bond redemptions, as total debt increases so do interest payments. If we assume the interest on the government debt ($12.9 trillion in 09) is 3.5% (10-year yield) it means taxpayers will have to pay more than $450 billion in interest each year before taking a dollar to fund spending. That equals the total deficit in 2009 ($455 billion)…

What I found interesting in Michael Pettis’s piece ( http://mpettis.com/2009/08/the-usg-doesn’t-need-foreigners-to-finance-the-us-fiscal-deficit-who-knew/) is that he first started talking about the government deficit but didn’t discuss the size ( its $1.8 trillion in 09) then magically switched to the current account deficit (a much smaller $409.5 billion) to do his math. He then goes on to say that current account deficit is falling and that is good news. But as I understand it, the current account deficit does not include the federal government deficit. and it is growing at  a current rate north of 20% per annum. Its the growing government spending and deficits (not the current account deficit) and the growing size of total debt (both government, private and corporate represented by total credit market debt) and the rate at which it is growing in real terms (35% faster than GDP since 2000) that presents the real challenges as I see them.

Matt Blackman

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