| | | I've written extensively about the inevitable demise of the USD as the reserve currency, and its forthcoming depreciation (one does not necessitate the other, but imo they are both coming).
Lyn Alden has a very good article that rehashes much of my opinion and also makes the case that printing the reserve currency is no longer in the US national interest. I highly recommend it.
All that aside, the world already does not believe in the ability of the US to pay its debt. If you look at the QE balance sheet, you will discover that the Fed has been the sole buyer of the US debt. In other words, the counterparty that you are talking about is the American public. Unfortunately, the US cannot invade and bomb itself, though I suspect that eventually the national guard will be called in.
This is one those open secrets that nobody talks about. The big central banks are all playing this game of publicly declaring their commitment to defending their currencies while at the same time printing an ungodly amount of money to inflate their way out of debt. The idea is to prevent public panic and a run on the currency for as long as possible.
Imagine if somehow the Fed was to raise the real interest rates to 2%. This would be historically low, but still. In that case the interest rate would be over 4% (some would argue 5%). And therefore just the annual interest payment by the US government on it $30T would be $1.2T!!
There just isn't enough tax revenue to support that payment. And this is to say nothing of the interest payments by the states and businesses.
So one way or another the US is going to default on its debt and everyone knows it. It's just that nobody wants to say it publicly while they are still holding some treasuries.
Meanwhile, every foreign nation is cashing in their treasuries and not taking any new issues. If you look at the Fed reverse repo, you see that the Fed dumps the bills on the banks during the day and the banks dump it back on the Fed during the night and collect net profits. What the banks are not doing is lending the money money out because nobody wants to take the US debt.
I should mention that the above is slightly exaggerated. But only slightly. There is still $9T (or was it 15T) worth of negative yielding debt. It it relatively risk free to swap it for treasuries, especially since ECB is calling the Fed's bluff and saying that they will let Euro to depreciate longer than the USD. But that is happening at the margins because only a small fraction of that debt can be swapped in. The vast majority of it has to be kept by European pension funds due to legal obligations. |
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