The Other Side Of Unsustainable
A quarterly miscellany of essays by Richard Dooling and news about his upcoming books. Subscribe here.
A $37 Trillion Credit Card Balance Transfer
During the last U.S. presidential election, American voters insisted that the economy was issue number one, but neither candidate campaigned on managing the national debt, or even mentioned it. Now the experts all agree that the government's $37 trillion debt is unsustainable, a scary thought, given that, since 2001, and for each of the last 24 years, the government has spent more than it took in and borrowed trillions to cover the difference. It's safe to assume that the country won't be living within its means anytime soon. But the economists don't tell us what will happen when that which is not capable of being sustained is sustained no longer?
I am not an economist. I majored in English literature and never took a business or finance course. I barely understand how treasury bonds work, but I'm told that it's how the government borrows money from investors to pay the interest on debt that it borrowed from other investors, so a little like a credit card balance transfer of $37 trillion? I remember juggling credit cards like this when I was young and foolish and completely broke. Is the government foolish and completely broke?
Should I believe the other guys in my old man's coffee group up here in Flyspeck, Montana, who tell me not to worry, because investors will always buy U.S. bonds no matter how many we sell? Why? Because the U.S. dollar is the world's safest, most trusted currency, the primary reserve currency of central banks all over the world.
How long will the dollar be the world's safest, most trusted currency if the International Monetary Fund ranks us among the world's ten most indebted countries, measured by debt-to-GDP ratio, with Greece a little more indebted than us, and Senegal and Ukraine more solvent?
What if our enemies make like Russia and start using the Chinese renminbi for their international transactions instead of the dollar? If the renminbi doesn't catch on, might other countries, like the Arab Gulf States, turn to crypto currencies or gold to teach us profligates a lesson?
Speaking of gold. It's October and the price of gold is up over 50% year-to-date? Why are investors buying gold instead of more Treasury bonds?
Should I worry that for 70 years United States treasuries held a pristine AAA rating, but now they merit only a AA rating? What if instead of giving the government more money to service its Mississippi River of debt, investors suddenly start buying bonds from companies like Microsoft, which pay about the same interest rate and have a AAA rating?
If I'm an old-timey banker or bond buyer with a sharp pencil and a green eyeshade deciding the credit worthiness of loan applicants, should I lend money to Microsoft CEO, Satya Nadella, whose company has $95 billion in cash and $40 billion of long-term debt? Or should I lend money to President Trump and Senate Minority leader, Chuck Schumer, who can't stop bickering long enough to sign the loan papers and whose country has zero cash and $37 trillion of long-term debt?
I was born and raised in Omaha, Nebraska, home of Warren Buffett's Berkshire Hathaway. Wealthy investors give cash to Berkshire so that experts like Buffett will invest it for them. What am I to think when Berkshire Hathaway has $350 billion in cash, almost a third of its holdings, and sees no stocks or bonds worth buying?
And how does the government respond? Time for a shutdown! Will investors line up to loan money to a country that is $37 trillion in debt and closed for business until further notice?
Will the government default on its debts? Or will it print $37 trillion new dollars and deliver them to its lenders in wheelbarrows and shipping containers?
I was driving my pickup truck to town for groceries the other day, when I heard on the radio that the shutdown could last until November, and maybe even longer. The next song up on my playlist was Creedence Clearwater Revival's Bad Moon Rising. Was that just a coincidence, or does it mean something?
Send The Dead
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