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US Debt? Stop Worrying. It's Fine

Everything is fine. Repeat, everything...

TOTAL U.S. DEBT now stands at $33.6 trillion. But this is fine, writes Tim Price at PriceValuePartners.

83% of US tax revenue in the last fiscal year was spent solely on social security, Medicare, the military, and interest on the national debt. But this is fine.

In mid-2020, the yield on the 10 year US Treasury bond – essentially, the global benchmark 'risk-free rate' – was at approximately 0.5%. It now stands at 5%. A surge higher of such magnitude in such a short period of time has probably never happened before. But this is fine.

For the six months to August, China, the second-largest foreign creditor to the United States, sold more than $45 billion of its Treasury holdings, according to official data. But this is fine.

Meanwhile the US Federal Reserve, which owns a large amount of US government debt that it has bought to support bond markets during periods of financial volatility, has begun to shrink the size of its balance sheet, reducing demand for US Treasuries just as the government needs to borrow even more. But this is fine.

Money supply growth in the US, on a monthly basis, is negative for the first time since the 1950s; on an annual basis, it is negative for the first time since the Great Depression. But this is fine.

Three of the four largest bank failures in US history took place during the early summer. More than $500 bn has had to be written off since March. But this is fine.

When Alan Greenspan was Chairman of the Federal Reserve in 2001, he enjoyed a Gallup confidence level of 74%. Jerome Powell currently enjoys a confidence level of 36%. But this is fine.

From 'Grant's Interest Rate Observer':

"We face a possible Dollar inflation uncertainty nightmare," writes the economist Charles W. Calomiris, in – of all places – a quarterly journal of the Federal Reserve System. The worst imaginable consequences of the subordination of monetary management to the public debt is the subject before the house.

"Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements" is the unsensational headline over the essay in which Calomiris advances his pulse-pounding conclusions. In it, the Henry Kaufman Professor of Financial Institutions Emeritus at the Columbia Business School speculates about a looming fiscal crisis, a buyers' strike against Treasury securities and the monetary-policy response to this imagined catastrophe. Suffice it to say that it isn't bullish.

"Many readers, not remembering the failed Treasury-bond auction of Aug. 1, 1973, will doubt that a creditors' strike is even conceivable. However, there's no quarrelling with the proposition that the Treasury is borrowing trouble. Calomiris chooses to preface his article with an excerpt from the Feb. 16 Financial Report of the United States Government, which reads:

"Under current policy and based on this report's assumptions, [government debt relative to GDP] is projected to reach 566% by 2097. The projected continuous rise of the debt-to-GDP ratio indicates that current policy is unsustainable."

Still, everything is fine...

...but just in case everything isn't fine, now would be a good time to reassess what you own in your investment portfolio, and why you own it.

London-based director at Price Value Partners Ltd, Tim Price has over 25 years of experience in both private client and institutional investment management. He has been shortlisted for the Private Asset Managers Awards program five years running, and is a previous winner in the category of Defensive Investment Performance.
See the full archive of Tim Price articles.


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