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The US Government Has Spent Itself Inbetween a Rock and a Hard Place

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As we pointed out in an article last week, the US federal government has added $1.5 trillion to the national debt over the last 12 months. As a result, the US Treasury Department is flooding the market with bonds. Meanwhile, the biggest buyers of US debt – China, Japan and the Federal Reserve – are shrinking their Treasury holdings. For the past several months, we’ve been saying this is a big problem for the US government that most people are overlooking. And we aren’t the only ones sounding warning bells.

Last week, the chair of the Treasury Borrowing Advisory Committee (TBAC) sent a letter to Steven Mnuchin containing what the Financial Times called “a bombshell.”

According to TBAC calculations, the Treasury Department will need to sell a staggering $12 trillion in bonds over the next decade. Even without factoring in the possibility of a recession this will “pose a unique challenge for Treasury.”

Keep in mind, Peter Schiff has been saying that a recession is already a done deal, so, it’s pretty foolish not to factor in that possibility.

Here’s how the Financial Times summed it up.

In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries?”

We’ve been asking the same question: who in the hell is going to buy all of these bonds?

Consider this: China and Japan rank as the two biggest holders of US debt.

  • China’s holdings fell by $55 billion from a year earlier to $1.12 trillion.
  • Japan’s holdings fell by $47 billion from a year earlier to $1.04 trillion. Japan has reduced its investments in US paper by 16% since its peak at the end of 2014 ($1.24 trillion).

That means Americans are going to have to foot their own bill. As the TBAC noted, “Given stagnation in international reserves, there is likely an increased need for this debt to be financed domestically.”

Domestic buyers have been picking up the load so far. American banks, hedge funds, pension funds, mutual funds, and other institutions along with individual investors increased their holdings of US Treasuries by $1.36 trillion between November 2017 and November 2018.

But how long can this keep up?

Here’s a little perspective courtesy of the Financial Times.

This week, one of America’s biggest hedge funds privately concluded that in five years’ time the Treasury will need to sell bonds equivalent to 25% of gross domestic product, up from 15% now. This level of debt has occurred just twice in the past 120 years, first during the second world war and then again during the 2008 financial crisis. The first time, the US government forced private domestic savers to buy its debt via a patriotic propaganda campaign and financial controls. The second time it relied on its central bank’s balance sheet via quantitative easing.”

Interestingly, the Fed is considering using QE “more readily” in the future. Perhaps the central bankers realize that there is no way the US government can continue this borrowing pace without the Fed monetizing the debt.

If that’s the case, this isn’t going to end well for the dollar. As Peter said during his keynote speech at the Vancouver Resource Investment Conference, QE is by definition inflation.

We’ve just created a massive amount of inflation. Quantitative easing is just a euphemism for inflation. That’s what inflation is — expanding the money supply. Printing up money and buying government bonds is the definition of inflation. The Fed has been inflating like crazy.”

Of course, the other possibility is that interest rates will surge as the supply of bonds outstrips demand. As we’ve said over and over again, rising interest rates aren’t good news in a world loaded up on debt.

It’s increasingly looking like the US government has spent itself between a rock and a hard place.

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