USA WILL degrade the US dollar to pay its debt and service its liabilities

First the data, then the analysis.

What is the level of America’s debt?

In the case of USA it is incorrect to look only at government debt. Government liabilities hold the key to understanding the current situation.

In 1997-98 while I was a doctoral student at USC, Los Angeles, I worked as a part time consultant for a political party in USA. The person who hired me would not tell me which political party had hired me, but paid me $17 per hour (which was not bad for a student) over the course of a few months. My job was to study the US social security system and advise on its details and precisely when the US government would run into trouble with its social security payments. One of my key findings (that I recollect) was that by 2017, the USA would receive less revenues from its social security system than it would need to pay out. It is many years now, so I’ve quickly researched a few charts to see where things are at today.

This 1998 estimate was overturned by subsequent facts:

The chart below shows that somewhere around 2007 the raw expense on US social security exceeded tax inflows.

Next, the chart below shows that US government spending is going to be squeezed out by committed social security liabilities. This is happening as we speak, even as the number of jobless is rising dramatically.

“The real issue, he said, is that federal spending for health care is expected to go from 14% of GDP today to 25% in the next several decades, meaning the size of the government would double “if we don’t do anything.”” [Source]

The chart below confirms that somewhere around the current period, social security has gone into permanent and growing deficit:

This problem is much bigger than the US debt problem. It is huge. Without going into details, it is what underpins the larger ‘debt’ estimates below.

1) $17 trillion

The US has a total debt pile of almost $17 trillion (£10.6 trillion), which is expected to rise to almost $23tn in the next five years [Source]

Even this paltry amount – in the range of 100 per cent of US GDP is huge – see the visualisation below:

2) $70 trillion

James Hamilton, Professor of Economics, University of California, San Diego:

3) $222 trillion

Laurence Kotlikoff, Professor of Economics, Boston University. Read this.

How much does USA have to pay each year to service the debt?

Last year’s interest payments on the debt totaled $360 billion, but those payments could reach $1 trillion by 2017. [Source]

I’m not sure this is right. There are too many variables here, and IF interest rates were to rise (as at one stage they surely will) interest payments can easily skyrocket. Of course, by destroying the American dollar, US could pay out in junk dollars.

Who owns the debt?

“foreign interests own roughly half of it” [Source]. That is around $8.5 trillion, with a good proportion of that owned by China and Japan. This is the key.

ANALYSIS

As Kotlikoff has said: “the US is bankrupt—not in 30 years, not in 10 years, not in 5 years, but today” [Source].

Everyone with any iota of sense is FULLY PREPARED FOR MASSIVE US DOLLAR DEVALUATION. The secret to success in this environment is to get out first and let the devil take the hindmost.

The good thing about American social security payments is that they are not affected by rising interest rates. America can destroy its dollar and pay out its “committed” an average of $20,000 (or whatever) per person in worthless junk dollars. This should be of concern to those who will retire soon, but is of no major concern to the rest of the world (of course, these impoverished elderly won’t be able to buy a lot of things so that will dampen the global economy).

But here is the crunch: while Americans have no choice but to be get a haircut, foreign owners of American debt DON’T want to be paid in junk dollars.

So the real issue driving the current situation is only this: when are the foreigners who own US dollars and US bonds going to get out of these holdings.

These people used to see America as a safe haven and often preferred the USD to gold. That preference is fast receding. Actions taken across the world to reduce exposure to US dollars and bonds include:

1) China and Japan have been rapidly getting out of US bonds [Source]. “The selling to date has been primarily long-term bonds. That’s because bonds with lengthy durations have the most to lose when interest rates rise”.

2) China and Russia are Acquiring Gold, Dumping US Dollars.

3) Central banks are investing an increasing amount of their $11.1tn-worth of reserves in Australian and Canadian dollars, according to International Monetary Fund data. [Source]

4) China and Australia (among many others) have moved into trade using the Australian dollar (instead of USD). [Source]

5) Gold price has been high (despite recent pull back)

To this analysis one must add the key finding of my recent review of the Robotic Economy. US companies are rapidly switching to IT and capital intensive production (which is good for USA in the long run). This means the number of unemployed is rising and will CONTINUE to rise, further putting a pressure on social security payouts. We should also not forget that longevity is likely to dramatically increase in the coming years, thereby pushing out social security deficits well into the future.

These data now lead to the following conclusions:

1) USA is bankrupt today and CANNOT pay its debt or service its liabilities in UNDILUTED dollars. It has to degrade the USD. This is an iron law of economics. The US cannot escape this law. This conclusion can change, however, if IT improvements such as 3D printing allow US to start producing massive quantities of goods at cheap prices, or it finds a really cheap source of energy (e.g. fusion).

2) The last one to hold US dollars will suffer the most. This means that the poorest people of USA will be severely impoverished in the coming decade. My sympathies with them. As a result, I also believe there is now a significant risk of social upheaval in USA.