Wednesday, April 26, 2023

"The Debt Elevator"

"The Debt Elevator"
Forget the so-called 'ceiling'... US debt is a one-way elevator
by Bill Bonner and Joel Bowman

Dublin, Ireland - "Well, here’s another thing not worth worrying about: the debt ceiling. MarketWatch: "The deadline to raise the U.S. debt ceiling is approaching faster than expected, with the political uncertainty surrounding when the government’s borrowing limit may be lifted already beginning to worry markets, according to Goldman Sachs Group."

We’ve got news. There is no debt ‘ceiling.’ US government debt is in an elevator that just goes one direction – up. The ceiling goes up with it. But as it rises, so does US vulnerability -- to defaults, bankruptcies, market crashes…and inflation.

You can blame the old fogies still in Washington – Biden, Pelosi, McConnell, et all. They were there the whole time – passing laws…approving regulations…raising the debt ceiling…spending money they didn’t have on projects America didn’t need. When Joe Biden was first elected to Congress, the US total federal debt was $427 billion. Now, it’s nearly $33 trillion…77 times as much.

Sanctions Backfiring: Until recently, the feds could ‘print’ dollars, confident that many of them would end up in foreign bank vaults. They would not be part of the US money supply; they would do no harm. But now, the red ink in US trade and budget figures is more crimson than ever….and those outward bound dollars have round trip tickets.

A major policy failure was turning the dollar, and the international financial system, into a weapon. Both Trump and Biden have used it like an AR-15 in the vegetable section of a supermarket, imposing sanctions against thousands of innocent foreigners. As predicted, and reported yesterday, those sanctions are backfiring. The foreigners are finding new non-dollar ways of doing business. The Cradle:

When the US and its allies blocked access by most Russian banks to the Belgium-based global financial messaging system, SWIFT, and froze some $300 billion in Russian foreign exchange reserves, every government from Riyadh to Beijing understood that such sanctions can happen to them as well.

This realization has prompted many countries to take action to decrease their vulnerability to sanctions, with China creating a new financial infrastructure outside US control and pushing for commodity suppliers to short-circuit the dollar. The establishment of a BRICS bank as a counterweight to the IMF is just one more step in that direction.

What is certain is that sanctions do not work. As the dollar is dropped and downgraded, so is America’s capacity to ‘export its inflation.’ And suddenly, it’s a whole new ballgame. Once again, overspending, over-borrowing, and over-printing matter. It’s not the debt ceiling that poses a problem; it’s the debt itself. Thanks to the reserve currency status of the dollar, excess greenbacks are still absorbed in overseas swamps. But as we saw yesterday, the swamps are being drained and dried out. Now, dollars accumulate at home…and raise consumer prices in the USA.

Our Dollars, Your Problem: Having the US dollar as the world’s reserve currency was a big contributor to America’s success. For more than half a century, as Treasury Secretary John Connelly pointed out to foreigners: the dollar ‘may be our currency, but it’s your problem.’ And it’s not the only problem. Here’s another part of the US success story, now becoming another self-inflicted wound.

When the ‘American century’ began, US industry was young and vigorous…and the US empire had just entered Eden. As the world’s richest, fastest growing, most powerful and most admired nation, it had only the devil to fear. Back then, ‘free trade’ benefited American exporters…and the world. The Financial Times:

"As an important recent paper from the Peterson Institute for International Economics by Alan Wolff, Robert Lawrence and Gary Hufbauer brings out, the hostility to trade that has increasingly seized the US risks reversing nine decades of hugely successful policy. Ever since the protectionist disaster of the early 1930s, the thrust of US policy has been towards creating an open and rules-governed trading system. These policies created a more prosperous world economy, which became the foundation of western economic (and so political) success in the cold war. They facilitated a staggering reduction in global poverty. They are the most important credential for the US claim to have been a benign hegemon. Waging war on trade will be costly."

As the US aged and foreigners caught up, the feds bit into the apple. Again, you can blame the old jackasses still in the Capitol. Over time, they diverted more and more of America’s wealth to unproductive projects, and burdened it with deadweight regulations. “Made in America” became less competitive on the world market. Then, ‘free trade’ was increasingly seen not as an opportunity, but a threat.

Record Deficit - In 2016, along came Donald Trump, who pried the Republican Party loose from its traditional loyalty to free trade. “A trade war is easy to win,” said The Donald. He claimed to ‘protect American jobs’ by reducing US imports from China and elsewhere. How did that work out? Trade with China dipped. And then recovered. Imports rose 14% from the year before, to a total of $353 billion. And then, the trade deficit with the whole world got worse too. Investopedia reports: "US Trade Deficit Hit Nearly $1 Trillion in 2022, Largest on Record."

"The U.S. trade deficit hit a record of almost $1 trillion in 2022, with more than a third of the total coming from trade with China. The annual goods and services trade deficit rose 12.2% to $948.1 billion, the Commerce Department reported Tuesday. The goods deficit jumped 9.3% to $1.19 trillion, while the services surplus declined 0.6% to $243.7 billion. The deficit with China was the largest, climbing $29.4 billion to $382.9 billion."

The debt ceiling is a typical Washington farce. Full of sound and fury, it signifies nothing. We all know how it will turn out. The war against free trade is a fraud too. Either people decide for themselves what they buy and from whom. Or someone else decides for them…and it is more expensive."

Joel’s Note: "The nation’s top Treasury official was in the news again yesterday, putting the fear of government default into the hearts of working Americans. Secretary Janet Yellen told officials at a confab in the nation’s capital that their constituents are greatly at risk if Congress fails to raise the debt limit by the summer. "The solution is simple,” lectured Yellen, “Congress must vote to raise or suspend the debt limit. It should do so without conditions, and it should not wait until the last minute.” A default, all agree, is simply unacceptable.

But despite what you may hear from squawking heads on the TV, this would not be the first time the US has defaulted on its debt obligations. Bonner Private Research’s macro analyst, Dan Denning, gives us the sorry history from up in his bolthole in Laramie, Wyoming…"Lincoln's Greenback was a default inasmuch as it was paper money, and no longer redeemable for gold. FDR's Executive Order 6102 was a default. And so was Nixon closing the gold window. All were/are unilateral redefinition of terms between the debtor (the United States Government) and the creditor (investors) which resulted in lower real returns for investors. Inflation, too, is soft default…"

Apparently oblivious to history, Miss Yellen went on to outline the obvious… that actions have consequences (who knew?) "In the longer term,” she told officials, “a default would raise the cost of borrowing into perpetuity. Future investments — including public investments — would become substantially more costly."

Well yes, Miss Yellen. That’s how borrowing and lending generally works. When the borrower is a deadbeat who constantly goes further and further into debt, racking up record deficits and spending like a drunken sailor, his creditors do tend to demand higher interest rates as a way of protecting themselves against (increasingly likely) non-payment.

And since the United States government is already in hoc to the tune of $31.7 trillion… about $94,000 per citizen… or $247,000 per taxpayer…And since the record trade deficit is currently bumping up against the $1 trillion mark…And since Congress has already voted – in their performative, theatrical manner – to raise the debt ceiling no less than 78 times since John F. Kennedy entered the White House, back in 1960…

Well then, yes… creditors might ask Uncle Sam to pony up a little more by way of payments, or at least leave his gold watch behind the bar while he calls his mates to come pick up the bar tab. Dear readers may expect a call in three, two, one…"

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