Monday, October 03, 2005

Why Keep Loaning Real Stuff to a Dead Beat Debtor?

The rest of the world sends more real stuff (oil, food, automobiles, computer parts, etc.) to the US than the US sends to the rest of the world, or the trade deficit. To make up the difference, the US creates digital dollars out of thin air and sends them over seas. Such a deal!

That is in affect a loan from the rest of the world of real stuff to the US since the US paid for real stuff with intrinsically worthless digital USD. Year after year the US trade deficit stays in existence, which is an accumulating loan from the rest of the world that keeps growing year after year. How big is the rest of the world going to let this loan get?

Never mind calling in the loan (the accumulated trade deficits), all the rest of the world has to do to put on a Big Hurt on the Big Easy (the US) is to simply stop making new annual loans to the US.

More loans: many/most of the US dollars that the rest of the world ends up with due to the trade deficit are loaned back to the US in the purchase of US Treasury bills, notes and bonds. Exactly why and how is another story.

The US government recently released the Federal Government's Debt for Fiscal Year 2005. This is debt in addition to the trade deficit. The increase in debt was $553 Billion. Additionally, $186 Billion is estimated to have been borrowed from Social Security. That is about an additional $0.739 Trillion of added debt in one year.

It appears that the management of the US has no intentions of changing anything in order to change the rate of increase of US total debt of all kinds.

How long can a dead beat debtor be allowed to keep piling on new debt?

US Treasury bonds and notes have been heading back down increasing yields and US interest rates at a time that the US economy is the Road Runner out past the edge of the cliff.

The selling of USD denominated financial instruments is not good for the value of the USD let alone the value of those instruments. But it is good for the USD price of gold and silver.

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