Last week we learned that the government’s total debt has reached an incredible $19.5 trillion. Since they hit $18.5 trillion in November of 2015, this means it only took them 10 months to pour another trillion onto the national debt pile. The government managed to do this without fighting a recession or a major war.
Nearly all of the money they receive in tax receipts goes to mandatory entitlement programs and the mounting interest on all of this debt. The net result you get from this is debt financing for most traditional government programs such as defense spending, the IRS, and airport security. The government has not suffered from a shortage of lenders in the past.
This is all starting to change now. The Treasury Department’s own most current data reveals that two of the largest foreign lenders to America, China and Japan, have already started reducing their over $2.3 trillion worth of American debt instrument holdings.
The Federal Reserve has been a reliable buyers since the financial crisis as well. They have increased their debt holdings from $479 billion immediately before the financial crisis erupted in 2008 to today’s present $2.46 trillion. This is an impressive over 500% increase in less than a decade.
They will not be a reliable buyer in the future though. Thanks to Congress seizing $20 billion from the Fed at the beginning of 2016, they have a miniscule .8% capital ratio now. This makes the Fed nearly insolvent and unable to create trillions more dollars to buy debt without creating economic instability for the United States.
The biggest single holder of U.S. Treasury debt remains the Social Security fund. For decades now, the program has loaned all of its tax take surplus to the federal government. They have provided trillions of dollars to the U.S. government in these years.
The problem with this source is that both Social Security and Medicare are nearing the end of their so-called surpluses. The board of trustees from Social Security has recently explained that the two largest trust funds start delivering critical deficits in 2020. Only 14 years later they will be depleted.
This gives them only four more years to loan money to the federal government. You can see that the government is going to have to find someone else to loan it money when its largest lender disappears. Otherwise they are forced to resort to capital controls.
This is already happening in Europe. The European Union’s new banking bail in rules mean that they seize account holders’ money over certain minimums whenever an institution is in trouble. Cyprus already did this a few years ago on all accounts over 100,000 Euros.
In European and other countries where negative interest rates are the order of the day, the banks have begun passing through to customers the negative rates. Sometimes these are explained in the forms of new fees to keep cash in current accounts when they do not want to say you have to pay for the privilege of keeping money in the bank.
There is even a move gaining traction in Europe (and the U.S. is studying it) to outlaw holding physical money. This would trap money in negative interest rate banks accounts.
The writing is on the wall. The U.S. government’s debt financing situation is unsustainable. They will be looking for additional dollars to appropriate within only a few short years.
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