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US Must Displace Global Treasury Bonds Activity

Interest-Rates / US Bonds Sep 01, 2010 - 01:10 AM GMT

By: Dr_Jeff_Lewis


Extremely low Treasury rates have been a boon for the Federal Government's bottom line, but they haven't helped attract any global interest in US debt.  Instead, nations around the world are cutting back on their Treasury positions, internalizing the financing of new debts and deficits.

Who Owns the Most US Debt?

The internalization of US national debts is nothing new.  For years, the positive income receipts from Social Security and Medicare taxes were pushed into the general fund, spent, and then replaced with Treasuries.  As a result, the American population as a whole is now one of the largest owners of the US national debt, even if no tax revenue exists to make eventual payments.

However, all of this debt does come at a cost, even if it is wholly 100% owned by US residents.  That cost is, of course, inflation, which is used to pad the budget in times of weak demand for US Treasuries.  At present, nations around the world (most notably in Asia) are backing off of US debt, and thanks to a looming “deflationary collapse,” Ben Bernanke has the economic firepower to continue quantitative easing to hide the huge US debt burden.

Who’s Not Buying US Treasuries? 

In just one year alone, China, the largest single foreign owner of US debt, has reduced its stockpile from $944 billion to $844 billion.  That reduction comes mostly from the collection on old debt, primarily in long bonds.  Short term debt, at least for the time being, has been rolled over consistently, showing us that China has at least some exit strategy, and it won't be afraid to cull back its short term purchases.

This August, new foreign purchases of US debt reached their lowest decade in years on Ben Bernanke's charge that the Fed will continue quantitative easing when needed.  That claim is one of certainty: the Federal Reserve absolutely has to monetize the debt in order to fill the demand for Treasuries and continue fiscal stimulus.  It should be blatantly obvious why no foreign nations are in a buying mood, as quantitative easing will drive bond yields lower and inflation higher.  Such an inversion is a losing proposition for countries with austerity on their minds.

Looking to the Not-So-Bright Future

The situation is only getting worse.  In the first quarter of the new fiscal year, and at the end of 2010, the Treasury will have to bring to auction at least $730 billion in new debt obligations.  This new money will have to come from internal sources, either through additional taxation to relieve at least some burden or inflation to erase any and all of the excess.  Of course, with a political party owning the legislative and executive branches of government, new taxes are off the table to stem political losses.

The future is certain, and inflation is inevitable.  In just seven years, the US government will have to start running at cost or face impending doom when Social Security goes income negative in 2017.  When expenditures outpace receipts, the internalization of US debt will matter no more, and you can be sure that any fiscal shortfall will be met with two parts inflation. 

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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