Is America’s Debt Party Coming to an End?

Good grief the debt!

The United States government and consumers spend way more than they make.  The recent “stimulus” bill signed into law by President Obama, for example, cost taxpayers an initial $787 billion and, if interest is factored in, brings the tab to almost $1.24 trillion.  Up until now the U.S. government has simply sold Treasury Bills and countries like China and Japan have faithfully bought them.  But with so much U.S. government debt on their books and an increasing need to spend that money domestically T-bill sales have tapered off.  Now there is a move afoot by countries like Russia and China to stop buying T-bills and, instead, use another currency:

China is “actively considering” buying up to $50bn of International Monetary Fund bonds, the country’s State Administration of Foreign Exchange has said.

John Lipsky, IMF first deputy managing director, confirmed the Chinese proposal, which follows one by Russia to buy $10bn (€7.1bn, £6.2bn) in IMF bonds.

The move is both financial and political in nature:

Meanwhile, earlier this year, China’s central bank governor caused a stir in global currency markets when he proposed replacing the US dollar as the world’s reserve currency with Special Drawing Rights, the IMF’s unit of account.

Zhou Xiaochuan also said SDRs should be based on a basket of currencies, including China’s renminbi.

Chinese officials have indicated that at least some of the IMF bonds it will buy will be in SDRs, which would help to diversify its US dollar-dominated foreign exchange reserves.

China is a growing nation and doesn’t want to play second fiddle to the U.S.’s irresponsible monetary policy of buying on credit (though such moves would make it harder, in the medium term, for Chinese exports to America).  The U.S. government has been in a feeding frenzy for debt as politicians, loathe to cut social spending programs (and in the case of the Democrats to drastically expand social spending), seek new ways to pay for their shopping lists.

The buffet bill will soon come due.

The moves to shift away from buying U.S. debt will have disastrous consequences for America.  A mini version of this crisis is currently going on in California where Democrats seek to raise taxes to close the $24 billion deficit while Republicans in that state insist upon cutting spending and opening the state to things like new drilling for oil.  What is becoming clear is the gorging on debt is beginning to come to an end:

Foreign governments and private investors dramatically reduced their purchases of US assets such as Treasuries in April, choosing instead to make riskier investments elsewhere.

Investors rushed to buy US government debt this year as the global economy teetered and they sought a safe place to park their money. That drove down Treasury yields which in turn reduced the interest rate on mortgages and helped stabilise the country’s collapsing housing market.

Net overseas purchases of long-term US securities such as long-dated Treasuries and equities dropped from $56.4bn in March to $34.3bn in April. Of that, foreign governments reduced their purchases from a net $26.4bn in March to $16bn in April.

In reducing their purchases of U.S. debt the effects of these actions has moved into other areas of the U.S. economy:

The move away from US Treasuries has reversed the virtuous circle that developed this year. Waning demand has forced yields higher and pushed up mortgage rates, which could snuff out the flickers of improvement in the housing market. This is in spite of the Federal Reserve’s efforts to keep rates low by buying up Treasuries.

We're over our limit.

What this is likely to mean to Obama and the Democrats is if they want things like universal healthcare they will have to raise taxes in the middle of a recession because they cannot depend upon China and other countries to pay for their promises.  If tax schemes like Cap-and-Trade are passed that giant sucking sound Ross Perot talked about will be the money flying out of the wallets of every American taxpayer and business as they struggle to pay increased “user fees” for their energy which will, in turn, cause inflation to rear its ugly head among other things.

What is clear is the grandiose social spending programs Obama and the Democrats want cannot be allowed to come to pass as it will mean disaster for the U.S. economy and, in turn, the rest of the world.

America went to the debt bank too much and now has worn out its welcome.  Although it will be a painful thing for this country and its citizens to live within their means, hopefully it will force Liberals to allow things like oil exploration, a pulling back of silly “alternative energy schemes” that produce little electricty and only soak up public monies, and for decreased government presence in the lives of Americans as the marketplace decides what works and what does not.

Related posts:

America Owes You (and Everybody Else) $64 Trillion!
Democrats Are Ruining America
America Will Drown (In Debt)
Obama’s Future for America: Europe?
American Treasury Bills: Too Much of a Good Thing
Obama Stays Up at Night Worrying About Debt