Lombardi: U.S. Debt Has Finally Become a Major Hazard to the Economy
This Article by Alessandro Brunowas published on LombardiLetter.com
President Donald Trump’s “Make America Great” policy certainly makes sense from the electoral point of view. But the way he has gone about “rebuilding” the greatness could backfire. It could produce the very opposite, starting with triggering a major U.S. debt crisis.
While the U.S. government continues to spend ever more money on defense, it’s overlooking a key weakness: U.S. debt.
Rather than retaliating militarily or diplomatically (through sanctions, for example), rival powers can use their holdings of U.S. debt to dump their Treasuries (Treasury Bonds) and launch a major strike against the dollar.
Given that the Trump White House appears convinced it can apply trade tariffs and enforce sanctions against potential “rivals,” the latter can use U.S. debt as a deterrent, especially when it continues to rise.
U.S. debt used to be $20.0 trillion when President Barack Obama left office. It now stands at $21.0 trillion with no hint of slowing, given the generous corporate and high net worth individuals’ tax cuts passed in December 2017.
Who Could Exploit U.S. Debt?
Unfortunately, it’s too late to discuss retaliation in the future tense. China and Russia have already begun using the U.S. debt weapon.
In April, Russia alone managed to sell half of its U.S. Treasury bonds. It now has a total of about $48.0 billion. That sum was $150.0 billion in 2013.
Russia used to be the world’s 16th top holder of U.S. debt. Now, it has dropped to 22nd.
After acquiring some $22.0 billion of U.S. debt in 2017, Russia made a swift turnaround selling it off between March and April 2018. It has been replacing the dollar with gold.
The U.S. Debt Weapon
President Vladimir Putin, unlike Trump, plays the long game. Rather than risk a counter-productive military move, he’s chosen to use the U.S. debt weapon. That can have a far more harmful impact.
China and Japan are respectively the first- and second-largest holders of U.S. debt. And Trump has left these countries little choice but to hit back against tariffs and duties against their exports.
Russia has set the path, but China and the European Union could follow up on the Treasury dumping spree to retaliate against their increasing grievances against Washington.
The U.S. Debt Jig Is Up
If that’s the reward for alliance, then what’s the punishment for “enemies?” Russia has revealed the solution to grab Trump’s attention: dump U.S. debt.
Of course, the biggest danger comes from China. Moody’s Investors Service warned that the trade wars and the related sovereign U.S. debt risk will face negative forces.
Certainly, whatever gains the steel industry makes from Trump’s aluminum tariffs, they will pale in comparison to the extent they will damage the U.S. economy.
Ultimately, what makes the U.S. unique and powerful, economically speaking, is its ability to control the dollar. It can run massive debt and be assured of always being able to dispose of excess “paper.”
This ability allows Washington to pay for the massive military bills that project American power worldwide.
When friends and foes start dumping that debt, therefore, it suggests that U.S. influence has waned. It also means that the U.S. economy won’t be able to function.
The Dollar Could Lose Its “Job”
The dollar’s job in global financial markets, and the related influence and liquidity of U.S. debt instruments, essentially allowed the U.S. economy to take on almost any risk burden.
No matter how extreme, the dollar’s status as “world currency” has until now enabled the United States to absorb shocks and changes in financial conditions.
Moody’s and other rating agencies could start lowering America’s credit rating. The first effect would be to make borrowing more expensive. The U.S. was one of the winning parties in World War 2 (Russia/the USSR was the other major one). It then “won” the Cold War.
But, winner or not, the rich and diverse U.S. economy can’t sustain its current burden of debt for much longer.
It’s also less able to advance its interests. The very sustainability and privileged status of the U.S. dollar have come under threat. It’s as if the world has identified the kryptonite that can bring down America’s (once) super-economy.
Without the power of U.S. Treasuries, the U.S. government will have to address the U.S. debt and the budget deficit. Failure and inability to do so cannot but result in the U.S. economy blowing up.