(September 17, 2005)

 

 

 

 

 

 

 

 

 

 

 
Here is yet another chart which should boggle your mind. What we have here is a display of the relationship between foreign buying of U.S. Treasuries (i.e. our Federal Deficit) and the interest rate our government pays buyers of that debt. As you can see, as foreign buyers were increasingly snapping up prodigious quantities of U.S. bonds--to the tune of $400 billion a quarter last year--then interest rates dropped. (Note that this chart reverses the usual format and places higher interest rates at the bottom of the chart.)

Simple addition is all that's needed to draw several sobering conclusions from this chart. First, let's add the $200 billion our nation spends in Iraq every year (if this is for a lousy $20 billion in oil annually, what a crummy deal) to the $200 billion promised for Katrina rebuilding by our President. That's $400 billion. Even before Katrina, the deficit was nearly $400 billion annually, so even if we weren't in Iraq we would still be running a nearly $200 billion deficit just to fund all the tax giveaways, costly (and mostly ineffective) drugs for seniors, and the rest of the money our free-spending leaders lavish on various interest groups (generally wealthy ones).

So let's round it all off to $600 billion in deficit spending. Our wonderful friends, the central banks of Asian nations, have most generously picked up the tab for the last $1.5 trillion or so of our public debt, but they appear to be getting tired of supporting our spendthrift ways, judging by the fact that their quarterly buying has dropped from $400 billion a quarter to a mere $100 billion. Four times $100 billion equals $400 billion, so gosh, it looks like we might have to fund $200 billion ourselves. Oops, the U.S. has a negative savings rate of .6%. Dang, with no savings, it might be hard to buy our own bonds. What a bother.

And who would be stupid enough to lose money by buying a Treasury bond, anyway? Producer Prices rose at a 7% annual rate in August, before Katrina, and we're paying bond holders a miserable 4.25%. Adjusted for inflation, they're actually losing money. Do you reckon we'll have to raise interest rates to something above inflation? In a rational world, the answer is yes.

So why have foreign central banks been so foolishly keen to keep buying our Treasuries? The answer is not easily reached. The usual reason given--Asian central banks recycling their trade surpluses in order to suppress the value of their currencies--turns out not to be supported by data (see this article in The Economist). While those are probably factors, it seems Asian governments may also be holding huge reserves as insurance against another Asian financial crisis of the 1997-98 sort.

One trend is certain: these banks are buying less and less of our debt, even as our political leadership revves up hundreds of billions more in deficit spending. It is difficult to foresee any outcome to this divergence other than rapidly increasing interest rates. And with higher rates, the Great Housing Bubble finally implodes, taking with it the entirely bogus "prosperity" which it spawned. The chickens are in sight, and they appear to be heading home to roost.

* * *

copyright © 2005 Charles Hugh Smith. All rights reserved in all media.

I would be honored if you linked this wEssay to your site, or printed a copy for your own use.

* * *