Proactive Investors - Interest payments on debt owed by the US government have exceeded military spending for the first time in more than 20 years.
The US Federal Reserve has the power to create new money at the push of a computer button, and the US dollar remains for the foreseeable future the world’s reserve currency, so there are as yet no meaningful concerns about default.
But warning signs are beginning to appear.
First, the squawking of two familiar types of hawk – defence and fiscal – has become louder, as the reality that US debt has itself become harder to sell has hit home.
Those that fund the US debt, the world’s big bond-buyers, and especially foreign governments, are increasingly reluctant to enter the market at anything other than very attractive prices.
And, you can’t blame them.
In a world in which complexity, financial and otherwise, increases exponentially by the day, the reasons that underlie the unattractiveness of US debt are refreshingly simple.
First: there just is too much American money around, be it cash, debt or derivative.
There were the bailouts of 2008 that were then followed by a general regime of money printing that lasted for at least a decade.
There were the COVID bailouts.
And then there’s been President Biden’s Inflation Reduction Act.
Perhaps it’s unarguable that US infrastructure was in dire need of investment. On the other hand, it’s also unarguable that the wider world wasn’t exactly crying out for another trillion dollars or so to be added to the general circulation.
Unsurprisingly, to everyone except the US’s own government and central bankers, inflation rolled in. To get it under control, a hefty and forceful rise in interest rates was required. And higher interest rates means that debt in turn becomes more expensive.
Assuming of course, that you even want that debt.
After all, given the tendency of all major governments to inflate debt away in recent decades, it begins to become open to question how much of a store of value it really is.
This week, gold has hit an all-time high. Co-incidence? – hardly.
And there’s the question of American integrity itself.
Not just in the flat sense of the word as it relates to trustworthiness. After the collapse of the weapons of mass destruction narrative twenty years ago, that’s never really coming back.
But there’s the integrity of America itself to consider.
Will it hold together as a country? Short-term, the issue isn’t really in doubt.
But longer-term, to outside observers, it’s not so clear. There’s 80mln Trump voters, many of whom rightly or wrongly no longer trust the democratic process. There’s talk of ‘lawfare’, of imprisoning political opponents on both sides, of separate narratives, of lies and deception around COVID, and new splits opening up at lower levels.
US campuses suddenly look like they did in the Vietnam era, as everyone accuses everyone else of genocide.
Sure, inside America, daily life continues, and such talk might seem alarmist.
But it’s outside observers who are buying US debt, not average Americans. And the country that’s getting projected onto the world stage in 2023 is not one that seems at ease with itself. It’s ruled by a gerontocracy with one foot in the grave and no real eye on, or understanding of the future.
Would you really buy a 30 year debt in a country like that, unless it was priced in a very advantageous way?
No? And nor would China.