To The Moon

The U.S. national debt was $31.5 trillion in January 2023 and has risen sharply as a percentage of GDP in recent years due to the pandemic. The forecast based on the U.S. budget is that the debt will continue to rise, not only absolutely, but also as a percentage of GDP. Moreover, interest rates have now risen, which means that the interest item on this debt is also going to rise. We are soon talking about an additional interest expense of 500 billion, equal to about 10 percent of tax revenues. Since the Americans have not issued centennial loans like Austria, many national debts will have to be refinanced in the coming years. By the way, there is still some $70 trillion worth of off-balance-sheet liabilities, not only Social Security and Medicare but also all the guarantees from Fannie Mae, Freddie Mac, etc.

Furthermore, Americans have a hefty budget deficit. That has increased under Trump, but the Democrats also show no initiative to reduce the debt. That deficit must also be financed. That deficit will continue to grow in the coming years because of the large investment programs.

The biggest buyer of US government bonds is the Federal Reserve, but it has begun quantitative tightening, although two-thirds of that has been undone in the past two weeks. Once calm returns to the financial sector, surely the Fed can be expected to stop buying up, but rather try to sell.

In the current banking crisis, Treasuries are the new subprime. Those government bonds created a large interest rate risk and losses. It is not obvious that commercial banks will buy more government bonds.

One big foreign buyer of U.S. government bonds is Japan. With interest rates in Japan at zero for an extended period, the Japanese are now investing some of their money in U.S. treasuries. But the Yield Curve Targeting policy in Japan needs to be changed. The mistake the central bank has made is by fiddling with the rate. In December it was raised from 0.25 percent to 0.5 percent. Where before the market did the work for the central bank, now the Bank of Japan has to do a lot of buying. Once interest rates rise further in Japan, there will be less interest in borrowing yen and issuing in dollars, thus less demand for U.S. government bonds as well.

The second major buyer (China) also wants to get rid of dollar bonds. Since the Great Financial Crisis, China wants to be less dependent on the dollar and U.S. monetary policy. The Chinese, like the Arabs, are watching with suspicion the Americans' approach to the Russians following the invasion of Ukraine. The Americans decided to use the dollar as a weapon against the Russians, something that could happen to the Chinese and the Arabs as well.

The large government bond positions on central banks' balance sheets are causing large price losses. In a short time, equity has evaporated. This means that eventually, new money (from the government) has to be added. This can be in the form of higher tax revenues or higher debt (more government bonds).

Other emerging markets outside of China have less need for U.S. dollars. India, for example, can pay for energy purchased in Russia in its own currency, and so can more Asian countries. Few buyers of U.S. sovereign debt remain, especially if aging pension funds also start operating on the selling side. There is nothing left but for Americans to start printing dollars. The great advantage of having their own currency is that Americans can always repay that debt down to the last cent, but the big question is what that currency is still worth.