Effor

Just read an interesting post on the Yahoo Tech Ticker site titled “Sum of All Fears: Stocks Slump But Bond Woes Are the Real Concern” and it mentions something that I haven’t talked about in quite awhile.  Bond prices.

You see, when we (the US Government) borrow billions and trillions to bail out bad companies, that money has to come from somewhere.  Since the government is broke and already owes over $10 trillion, who do they borrow it from?

In the 30′s and 40′s, we borrowed it from ourselves.  FDR’s massive spending on the New Deal and World War II was almost 100% financed by people in the US buying bonds.  Savings bonds and  war bonds were bought by millions of average American families – because they believed in the government – and because (this is key!) they had savings to invest.

As a country, we no longer have savings to invest.  The collective savings rate over the past few decades has been steadily declining.  You can see some decent stats on it here.

So where does the Fed get the trillions of dollars they are spending?  Mainly from foreign countries.  And China is by far the largest loan shark we deal with.  The Chinese currently own over 22% of our public debt, followed by Japan with about 19%.   The Chinese and Japanese have savings.

To put it another way, we owe those two countries about $1.2 trillion as of November 2008.  I can’t find more recent numbers anywhere right now, but since our national debt has exploded since November – thanks to the B.O. (Bush and Obama) bailouts – I can only assume  that that number has expanded by quite a bit.

But that’s not why I wanted to write this….

I wanted to write this to highlight something that many people are utterly ignorant of – what happens when (not if) the Chinese, Japanese, and other foreign investors come to realize that we’ll never pay them back?  That we don’t have enough money to even pay the interest we owe them?

At some point, foreign investors will realize that they’re lending us money to make interest only payments on the money they loaned us 10 years ago.  If they have any common sense – and I believe the Chinese and Japanese are not short of that commodity – they’ll force us to pay much higher interest rates if we want to borrow their money.  As a nation, we’ve become sub-prime borrowers.

The Yahoo article I mentioned in the first line of this post has this paragraph: Prices of Treasuries with maturities of two-years and longer fell sharply in reaction to the lackluster demand for the 5-year auction, which “may signal investors will have trouble absorbing the as-much-as $2.5 trillion in debt the U.S. is likely to issue this year to pay for a $1 trillion budget deficit and programs to spur the economy,” Bloomberg says.

The last paragraph is particularly ominous and talks about what I’ve been saying:  Then there’s the scenario where the U.S. government is forced to pay extremely high interest rates – or is simply unable to sell Treasuries – because foreign buyers go on strike. We’re a long way from that “sum of all fears” outcome, but comments from Chinese Premier Wen Jiabao at Davos critical of U.S. economic policy suggest it’s getting closer – especially in the wake of Tim Geithner’s “manipulation” comment.

The article says “We’re a long way from that “sum of all fears” outcome” but I don’t think the timing of that outcome really matters.   It will happen, and the faster we borrow as a nation, the faster that day will come.

Guess what happens on the day that foreigners no longer want to buy our debt?  We’re technically bankrupt now – when that day comes, it’ll be official.  The headlines will read “USA, RIP”.

(Added a few minutes later) I forgot to mention an alternative to this scenario.  Instead of borrowing money from foreigners, we could simply print more money.  Which causes hyper-inflation.  I suspect we’ll combine these two methods of bankruptcy, so we’ll borrow money as long as we can, then we’ll print it.

The details don’t really matter, as the end result is always the same.  Read some history.  Here’s what happens over and over.  A total collapse of the economy, followed by anarchy, followed by a dictatorship.  I hope I’m wrong.  I fear I’m right.

gk

Filed under: Economy, Political Tagged: | bailout, bonds, Debt, interest rates, public debt, savings rate, US Debt, US ecomony, US Public Debt