IIMR October 2023 'Explosion in USA public debt'

Professor Tim Congdon highlights the alarming trends in the USA's public finances and raises questions over sustainability and what a loss of market confidence will mean for US Treasuries; with a focus on the the debt interest cost whereas most market watchers and economists are fixated by debt to GDP ratios.

[PhilipWong]

The US national debt is more than $33 trillion, with 38% of it held by foreign entities. The US also has $38 trillion in unfunded Medicare liabilities and $17 trillion in unfunded Social Security liabilities.

The US dollar is the dominant reserve currency, backed by its perceived strength, allowing the US to print unlimited dollars as long as the world maintains trust in it. The US dollar is the backbone of US power, and any actions that undermine confidence in the currency threaten to destabilize its position of dominance. Each unilateral sanction imposed by the US risks damaging the stability and credibility of the US dollar, leading to dire consequences for the nation's power and influence. The US is the only country actively undermining the strength of the US dollar. The freezing of Russia's $300 billion currency reserve by Western governments may lead countries to reconsider investing their funds in US Treasury bonds and finding ways to reduce their use of the US dollar.

A significant portion of US dollars is held outside the US, estimated at 60-70% of all US dollars in circulation, due to its status as the dominant reserve currency and wide use in international trade and finance. The one trillion dollar trade deficit of the US is a consequence of being the reserve currency, as a strong dollar makes it difficult for US businesses to export goods and services while simultaneously making it easier for other countries to sell to the US. Countries are expending resources and labor making goods and shipping them to the US in exchange for green pieces of paper. The US is sending back mostly empty containers.

The US budget deficit is $1.38 trillion in 2022 which must be paid for by selling more Treasury bonds. The interest on this debt is greater than the military budget. To pay the interest on its debt, the government sells more Treasury bonds, leading to a cycle of increasing debt. The US printing of dollars has been exporting inflation in other countries for decades, but will eventually increase US inflation. Raising interest rates to fight inflation decreases consumer and business spending, increases the trade deficit, and higher interest payments on government debt. Other countries will respond to the US raising of interest rate by raising their interest rate, risking global recession. The Plaza Accord addressed this issue in the past, but it will be challenging to implement such measures now.

A well-run country collects taxes to fund essential services and infrastructure. In the US political system, wealthy corporations and individuals can lobby for tax breaks. The shortfall in funding for the US government has reached $31 trillion. Instead of collecting taxes from wealthy corporations and individuals, the government pays interest to them.

Banks hold Treasury bonds for their safety, liquidity, regulatory compliance, and potential profitability. When interest rates on Treasury bonds rise sharply, the decrease in bond values reduces liquidity and makes it harder for banks to raise cash quickly. This causes depositors to lose confidence, triggering a bank run. In response to the current bank run, the government is issuing Treasury bonds to raise funds to compensate depositors for any lost funds. There are $19 trillion in deposits in US banks. The estimated unrealized loss on US banks' financial assets is $1.94 trillion, while the total size of their equity is $2.1 trillion. SVB had taken a $15 billion loss, while their capital is $16 billion. Around 2, 315 of the 4, 800 banks are currently sitting on assets worth less than their liabilities. It's a systemic issue.

A similar issue is being played out with risker Mortgage-Backed Securities (MBS) valued at $12 trillion.

The new Bank Term Funding Program (BTFP) helps prevent discounted bondholders from taking losses when they have to sell them urgently. The BTFP accepts discounted bonds at face value to be used as pledges for loans to inject more money into the economy. Risking more inflation.

It's a Ponzi scheme. Ponzi scheme cannot taper. We reached the can and there is no more road.

[gecko]

The IMF is assuming no recession. Amazing.

[georgekazanchyan]

Negative interest rates will follow after higher for longer.

[apnira]

As for comments above about interest cost as % of spend or interest spend v military spend, just remember the president who in 2018-2020 raised national debt by 33% (!!!!) with one tax cut for the rich…….

[ThisIsMyOtherBrotherDaryl]

According to the US Treasury, the budget deficit for 2023 was $1.7 tril. However, the total US debt grew by $2.24 tril for 2023. So your estimate was correct.

[paulflannery]

Just now figuring out the debt is a problem? I've known it for years.The big thinkers have pea brains!

[leonardgibney]

It's so great Uk/USA it can't be repaid. I heard the US national debt was in the trillions.

[fatjohn]

As you said it will inflate it's way out of it.
Inflate just until the treasury reserve will be revalued to a substantial % of debt or a substantial (100%+) % of interest on debt.
The gold reserve.
Gold will revalue itself to $20000 or $30000 per ounce (well the $ will revalue itself at 1/20000th - 1/30000th of an ounce) at which point the US can sell it to generate buying pressure in the bond market and do two things simultaneously: lower the debt and push yields down.
They dont even have to sell it, just the mere option of doing so should provide a ceiling for gold and a floor for bonds.
The only thing that can go (even more catastrophically) wrong is if the treasury opts to sell the gold way too soon.
Then there is no limit to how far the $ can fall or how high gold can rise (depending how you look at it).

I think the Eurozone, an economy now just over half the size of the US with a larger gold reserve and lower debt level, will do quite well.

[christoschristou]

Is the US debt more like $41.6tn ($33.7tn plus $7.9tn "Each week, the Federal Reserve publishes its balance sheet, typically on Wednesday afternoon around 4:30 p.m. As of October 25, the Fed’s assets stand at $7.9 trillion."?? XAU LUCK.

[corbettroberts]

What would you do if you lived in America?

[apnira]

Dude did you make any allowance for Ukraine aid spend 2022 v 2023? Not all expenditure is recurring expenditure…..