Weekly Market Update: Protect Your Retirement Account from Unsustainable, Rising Government Debt
The most recent Treasury Report is out and it reveals disturbing news. The net worth of the United States is now officially reduced to minus $21.5 trillion. The country’s total national debt has catapulted up to pass $22 trillion. Every month, President Trump’s administration adds to the debt pile with multiple billion dollar deficits. This graph depicts the shocking rise in national debt:
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The real question is: Can the government indefinitely sustain this debt fiasco? Economist and analyst Wolf Richter argues that the United States is in a select club of financially troubled nations. The U.S. shares the deteriorating financial position of countries including Italy, Greece, and Japan.
It is true that Japan and the United States possess a single helpful advantage over Italy, Greece, and some other countries. The U.S. and Japan have full control over their own currencies. It allows their central banks (like the Federal Reserve and the Bank of Japan) to literally print their own money in order to by up government debt.
In Japan, their central bank keeps aggressively monetizing the debt of the government. In 2018 though, the Federal Reserve has not been a buyer of U.S. Treasuries. The end of the Federal Reserve’s program of reducing its balance sheet may change this before long, but as of now, it is actually not the country’s central bank making the runaway government spending possible.
It begs the questions: who is purchasing all this mountain of American debt and why? Answering the first question is straightforward. The total of all foreign investor holdings of U.S. Treasuries amounts to $6.4 trillion. Even after divesting some of their holdings, China and Japan are still ranked as the two biggest foreign investors in it.
The Federal Reserve presently holds approximately $2.1 trillion of American debt. American-based institutions and investors have around $7.7 trillion. They remain the biggest single category of Treasury holders.
A close second is the Social Security Trust Fund and pension funds (U.S. government entities). Between them they count almost $6 trillion of U.S. Treasuries in their holdings. The argument that this is money we borrowed from ourselves is deeply flawed. As Richter points out:
“This money is owed to those beneficiaries and it doesn’t cancel out. It is a real debt that the U.S. government owes and it has to pay.”
Keep in mind that China has reduced its sum total of U.S. Treasuries by around $46 billion versus just a year ago. The two Asian giants of Japan and China have a combined total holdings of around 10 percent of American debt. This impressive (or disturbing) figure is still off of 2018’s 11 percent total holdings that they counted last year.
Over the past year, U.S. investors have bought up the lion’s share of American government debt, approximately $1.2 trillion in just the past 12 months. This can not go on forever; it is unsustainable. The perception that the debt does not seem to be having any real impact on the economy is false. The point of Treasury oversupply as government spending continues to runaway looms large.
When we soon reach that point, the American federal government will encounter serious problems and have to make tough choices. The buyer of last resort will remain the Federal Reserve. This amounts to continued money printing in the form of quantitative easing. Keep in mind that as Treasury demand begins to decline, it forces interest rates (across the entire economy) to go higher as a result of supply and demand economics.
Is Your Retirement Portfolio Protected from Quantitative Easing and Rising Interest Rates?
In the end, the Fed will be left with only two unpalatable choices. Either they will have to cut interest rates and engage in more quantitative easing, leading to still more inflation. Alternatively they could simply do nothing and allow interest rates to skyrocket. Allowing interest rates to run wild would spell certain death for a national economy constructed on massive debt. Any way you look at the fiscal policies in Washington, the federal government in on a path that they can not possibly sustain much longer.
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