Interesting Times
The giant federal debt isn’t just borrowed money. It is also lent money.
Loans are two-party transactions. One side receives temporary use of cash which it agrees to repay with interest. The other gives up the current use of that cash in exchange for receiving interest.
Ideally, it works out for both… but not always.
The US Treasury Department doesn’t have to visit a banker, hat in hand, when it wants to borrow money. The opposite is more accurate. Treasury holds periodic auctions to which it invites the bankers, giving them the “opportunity” to have Uncle Sam borrow their money.
Who are these lenders/bondholders? The Treasury Department keeps track of this (it’s always good to know your lenders). The calculations below come from Wolf Richter of the Wolf Street blog,
who nicely summarized the current situation last week.
I’m often asked what will happen when/if the Chinese or others decide to stop buying our Treasury securities.
Foreigners presently own just under 30% of the outstanding marketable Treasury debt—roughly $8 trillion. A large sum, obviously, but these aren’t necessarily foreign investors. Much of it is held as central bank reserves.
Treasury will need more buyers. How to attract them?
The likely answer: higher yields. Which will of course make the deficit worse. Just ugh.
Financing costs are now growing faster than the economy, which is also the tax base
Maintaining the higher interest rates necessary to hold inflation at bay will raise the US government’s borrowing costs and further enlarge the debt. We are past the point of any good choices.
We can’t rule out a disorderly crisis in which the Treasury market just breaks down. All this is based on trust: that the dollar will hold value, that the government will pay its bills, that the US economy keeps growing, that no world-changing “accidents” happen.
Trust is fickle. Trust (confidence) can break down quickly (as I noted in last week’s letter).
https://englundmacro.blogspot.com/2024/06/people-keep-asking-me-when-is-crisis.html
We may already be seeing early signs of it.
This doesn’t mean a crisis is imminent.
It does suggest a crisis is coming.
John Mauldin 28 June 2024
https://www.mauldineconomics.com/frontlinethoughts/debtors-and-creditors
The U.S. trade deficit in goods widened to $100.6 billion in May (englundmacro.blogspot.com)
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