Tuesday, December 27, 2022

How Will it End?

 I was counting sheep the other night.  Of course my way is a bit ... different.  I calculate squares of two digit numbers in my head.  (It is really easy.  Every two digit number can be converted to (x + a). where x is the next lowest multiple of 10.  Binomial expansion: (x + a)^2 = x^2 + 2xa + a^2.  You can do all those in your head and add them.  Try it... I'll wait.)

So when I reached 99^2, I started trying to imagine how the generation who think Biden is a great president will confront the national debt end game.  When this happens, I am not sure, but I am hoping after I have returned to the carbon cycle.

We finance our national debt through Treasury-bonds.  Alexander Hamilton's wit in assuming state Revolutionary War debts and giving the new nation a topnotch credit score and a couple of centuries of adults running the country means that we are still the safest place to put money that you want to earn interest and be sure that it will not disappear in the future.

The Congressional Budget Office projects that interest payments will surpass defense spending in 2029 and will be close to nondefense spending in 2032.  At some point the national government will run out of subtle ways to tax the income of middle class and low-end millionaires.  Get unsubtle and you lose the next election and by percentages that are beyond the margin of fraud.

The billionaires, of course, are safe, regardless.  You can buy a lot of Congresscritters when you have a billion dollars.  SBF and FTX is your example.

So, what happens?  The U.S. can start by suspending interest payments to nations who seem too willing to challenge us for supremacy.  "China has steadily accumulated U.S. Treasury securities over the last few decades. In August 2022, the Asian nation owned $971.8 billion in Treasurys, roughly 13% of the U.S. national debt."  It is also believed that a few hundred billion is owned by the humbly paid civil servants of China.  As that article points out a Chinese sell-off of T-bonds would drive down prices substantially; the last T-bonds sold would be worth far less than the first ones sold.  ("If you owe a bank a million dollars you have a problem.  If you owe a bank a billion dollars, they have a problem.") 

 China’s strategy is to maintain export-led growth, which aids in generating jobs and enables it, through such continued growth, to keep its large population productively engaged. Since this strategy is dependent on exports, China requires RMB in order to continue to have a lower currency than the USD, and thus offer cheaper prices.

If the PBOC stops interfering—in the previously described manner—the RMB would self-correct and appreciate in value, thus making Chinese exports costlier. It would lead to a major crisis of unemployment due to the loss of export business.

What would China do?  Nuke the nation who they are hoping might resume interest payments and which will nuke them right back?  Even invading the U.S. unsuccessfully would destroy our credit rating.

However, even suspending payments just to China would technically be a default and raise interest rates on all future T-bonds.  Institutional and individual owners of T-bonds would see a sharp reduction in value of those bonds.  I suspect before that point was reached, there would be a massive flight from T-bonds to equities and state bonds, producing a truly amazing bull market.

Increased interest rates would quickly make financing the house of cards impossible.  I can see Medicaid and Medicare stop making payments.  Medicaid recipients are usually poor and not a risky voting population.  Medicare and Social Security are riskier; old people vote.  Still, hospitals would start competing on price if they have to rely on cash payments; many retirees are not poor.

At some point, the national government would be forced to reduce spending in other categories.  Depending on which party is left holding the bag, this could be a good thing or a bad thing.  (Okay, strictly speaking, "a bad thing" or a "really bad thing.")  I can see states taking over essential duties.

1 comment:

  1. You don't count the legs and divide by four?

    Interest rates have been suppressed for over twenty years. It's not surprising that in that time, the government (our elected employees) have learned to exploit that artificially low cost of our grandchildren's money.