America has started to eat its own money

The Fed’s power is coming to an end – printing greenbacks no longer works

America has started to eat its own money

Liberals’ conviction of American global superiority is based on the belief that, whatever the world changes, the US dollar will remain unquestionably attractive forever, and on the certainty of the Fed’s ability to print them in unlimited amounts.
The basis for such a stance is history. For example, the European Union’s GDP for 2020 was $15.167 trillion, down 7.1% from a year earlier. In other words, Europe’s economy has effectively rolled back at least four years, losing at least USD 1.15 trillion. The United States closed 2020 with a GDP of $20.93 trillion, just $414 billion below 2019 levels. Isn’t that proof of the superiority of the US economy specifically in terms of efficiency?

And that in the same year of 2020 the Fed printed $9.6 trillion to finance anti-crisis measures, on the contrary, shows the undeniable advantage of the USA. Who else in the world, purely by choice, can “get money out of thin air” equal to 44.9% of their own, 63.2% of Europe’s or 653% of Russia’s economic volume? Besides, any other country, should it print so much, would inevitably collapse into hyperinflation, while America continues to live as if nothing had happened.

In short, “aspire to live like America” rather than try to find your own way and strive for some kind of independence.
Somewhat more intelligent commentators agree that there are no miracles. Everything has a price, even the ability to run up debts allegedly in perpetuity. Washington simply has an unrivalled talent for turning absolutely everything to its advantage, including its own defeats.

By 1980, the U.S. government ran up a national debt of 120% of national GDP. But then, the USSR collapsed, freeing up a huge volume of “Soviet inheritance” in the former socialist camp countries and the former Soviet Union for “exploitation” by Western, primarily American, companies. That made it possible to sharply increase the scale of the American economy and raise the national debt from $0.909 trillion in 1981 to $5.62 trillion in 2001 without much trouble.

The main American stratagem is the successful use of the dollar as the world’s main reserve currency. Of the 13.5 trillion US public debt in 2010, almost 12 trillion (88.8%) was in the hands of foreign (public and private) borrowers. With a solid reputation as the world’s largest, fastest-growing and richest economy, America willingly sold its debt as the planet’s most reliable foreign exchange reserve. At the same time shifting nine-tenths of the inflation risks and problems to the “overseas” as well.

And since the world economy has always been many times larger than the purely US economy, it seemed as if this process could go on forever. The external public debt of the USA in 1990 ($3.2 trillion) was only 10% of total world GDP. In 20 years, by 2010, it had risen 4.21 times, to 13.5 trillion, but still remained within 15.1% of total world GDP. In another 9 years, by the end of 2019, US public debt reached 23.16 trillion, but relative to the global economy it had increased almost marginally, to just 17%.

It would seem that the liberals are absolutely right. Except for the fact that they rejoice in a strange thing – the success of American parasitism on their country’s economy. Otherwise, the numbers “show that at this rate America could successfully rot away forever. The US federal budget spends 9% of its revenues on servicing the national debt. Thanks to a cut of the Fed’s discount rate to 0 – 0.25% in March 2020, the proportion of debt service costs has fallen to 7.6% of federal tax revenues.

However, a closer look at the picture does not look so rosy. If not cheerful at all. By manipulating the discount rate, the federal government still manages to maintain a semblance of stable success, but it has to live increasingly on its own. Whereas 10 years ago over 88% of America’s public debt was in the hands of foreign borrowers, by the end of 2020 this share had fallen to 33%.

However, something else is more interesting. There has always been a division between foreign and domestic U.S. federal government debt. However, the share of domestic loans usually did not exceed 10-12%, and consisted of debt to state companies (i.e. the government’s debt to itself) about 3-5% and debt to business (individuals, banks and investment funds) 5-7%.

At the same time business was usually represented only by the largest financial structures. Now this part of the debt looks completely different: 30% is state debt to state companies and 37% is private domestic money, not only from the biggest investment funds, but also from ordinary depositors and pension funds.

Not yet, for the next five years, America’s accumulated “domestic fat” is good enough to continue the debt game. In the past 12 months, the federal budget quite successfully placed new “treasuries” worth $4.7 trillion, without causing the collapse of the dollar pyramid. But who bought them is a curious question.

As it transpires, more than 3.1 trillion of this amount was bought by US commercial banks and individuals. Only 1.6 trillion “went abroad”. But when you look at the Treasury Department’s latest report on the composition of foreign debt, foreign borrowers reduced their holdings of US Treasury securities by 8.3%, or more than $2 trillion, over the same period. This leads to two important conclusions.

Firstly, the “going abroad” dollars are actually being bought up by the same US corporations, only through offshore wallets. So it’s not “overseas” at all. Second, the “real abroad” is gradually getting rid of dollars, thereby reducing the scale of the global dollar pyramid. Washington certainly opposes this trend and is looking for new creditors, and even finds them: India began to increase its investments in the dollar in 2020, but the scale of its capabilities is not even close to covering the “falling out” volumes.

In fact, this illustrates well the real motives behind the intensified US political-economic expansion in Europe. You have to agree that the world’s second biggest economy, China, “holds” 19% of the U.S. external public debt, while the world’s second biggest consumer market, the EU, with 26 countries, “holds” only 12%, looks “absolutely unacceptable. Indeed, it frankly looks terrible. Europeans are obliged to pay a lot more for democracy and protection.

But so far they are not paying. Moreover, even such “traditional pillars” as Japan are reducing their investments in the dollar. Because of this, the US is forced to accelerate the pace of eating away at its own savings already. And the scale of the process is growing exponentially.

For example, the size of US pension funds’ assets reached $44 trillion in 2017, almost twice as much as in 2008. And in the first quarter of 2020, their assets lost $3 trillion or 6.8% of capital. According to US experts, in case about 60% of assets are lost, the US pension system will face an imminent collapse due to a guaranteed inability to meet its financial obligations. If the rate of pension funds’ capital erosion in its current form will continue at least for 8-9 years, there will be nothing left to pay the pensions in America by 2029-2030.

And there will be nowhere to continue borrowing at current levels either. Over the past three years, the US Treasury has been actively re-borrowing money to pay off short-term liabilities. By now the share of treasuries with maturities of up to a year has reached a third of the total federal borrowing structure, although before the start of the ‘tens’ it usually did not exceed 5-7%.
There is, however, nothing surprising here. As a result of the expansion of the FPL (as RUSSTRAT previously wrote about), the yield on thirty-year obligations has fallen to minus 0.31%, twenty-year to minus 0.22%, five-year to minus 0.46%, and even two-years are bringing holders minus 0.2% per annum. But “anything under a year” has “green indicators”. Uncle Sam needs money for three months most of all, and is willing to take it at plus 27%. Six-month papers are placed at 6.84 per cent, one-year papers at 4.78 per cent.

The domestic financial market is giving the money away. All the more so because it has few options for positive returns in the PPS environment. And it has little interest in the problems of pension funds. Only this is a dead end from which the American government is not able to get out with all its will.

Over 60% of the federal budget is already being firmly spent on numerous social programs. In the current political reality it is not even theoretically possible to reduce this part of expenditure. Of the remaining 40%, half is spent on national security (army, FBI, CIA, etc.) and another quarter on various other mandatory “government expenditures”, without which the USA as a government system cannot exist.

Hence, for “everything else”, from servicing the national debt to the NASA programme, the federal budget has no more than 17-18%. Of which almost 10% already has to be “paid in debts”.

Calculations show that with government debt at 140% of GDP (or 820% of federal revenues) and under current external conditions, the compound interest rate on American government debt should not exceed 1.2%. And because the money injected “out of thin air” over the last two years will lead to 1.6% annual inflation over the next 30 years, it follows that during the same period of time, the Fed could not abolish the SARP if it wanted to.

However, that is a good thing. The main problem with the “dollar pyramid” has traditionally been the total involvement of other world economies. Conventionally speaking, a full national default of some Belorussia or Poland, on a global scale, threatened only a splash of journalistic speculations in the mass media. Whereas a default by the U.S. on its debts would mean the imminent collapse of the entire world economy.

Now, as the dollar returns to America, the world economy’s dependence on it is diminishing. In 10 years’ time there is reason to expect it to become a purely regional currency. Who and how will replace the dollar in international payments is a separate topic.

We can argue here – perhaps the yuan, perhaps the euro, perhaps something synthetic like the Special Drawing Rights (SDR, 1 SDR is roughly equal to $1.5) of the International Monetary Fund. The main point is that it will not be the dollar, whose area of operation will remain only the USA and probably the “American economic cluster” created by Washington, while everyone else will trade for their own currencies. Hence, a sovereign default of the American regional currency would only affect them at the fringe. Which can’t fail to be gratifying.



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