Has the US Reached Its Debt Limit?

From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan said the dollar's depreciation may reflect growing unwillingness among foreigners to buy U.S. debt.

``Obviously there is a limit to the extent that obligations to foreigners can reach,'' Greenspan said in a speech in Washington today. The dollar's decline to its lowest since 1997 may be ``an indication America is approaching this limit.''

Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. financial assets in August. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July.

While I have had more then my share of disagreements with Greenspan, that does not take away from the fact that he is a very smart economist. And frankly, he may have a really good point here.

Let's go back through some charts to see exactly what is going on.

Here is a chart from the St. Louis Federal Reserve of Total US debt.

First, let's remember that the "fiscally responsible" Republicans have added a ton of debt. Notice the big changes under Reagan and Bush II. (We have to remember it because the Republicans never want to).

Not all of this is held by the public -- some of it is "intra-governmental" meaning it is held by federal agencies. However, a little under $5 trillion is held by the public.

All of this debt has to go somewhere -- meaning someone has to buy this stuff when it goes on the market. So far, foreigners have been very generous in helping us out with this. Here is a chart from the St. Louis Federal Reserve of total foreign holdings of US debt.

However, the big foreign buyers of US debt aren't buying this debt like they use to. According to information from the Treasury Department, the five largest holders of US debt (Japan, China, UK, Oil Exporters and Brazil) owned a combined total of $1.224 trillion in August 2006 and $1.459 trillion in August 2007. That's an increase of $235 billion. And over that same time, the really big purchases came from the UK ($189.4 billion) and Brazil ($63.6 billion.) China only increased their holdings by $13 billion and Japan decreased their holdings by $37.9 billion. In other words, Asian Central Banks -- who use to be reliable purchasers of US debt just aren't that interested in buying anymore right now.

With the above information in mind, here is a chart of the US dollar over the last two years. Notice its value has been dropping over that time:

So -- why is the US dollar dropping? This is where Greenspan's comments come into play. Currency traders are obviously selling the dollar. While they have had ample reason to sell lately, the US economy wasn't slowing until the first quarter of this year -- hardly a reason to sell. One underlying reason may be a lack of confidence in the US' fiscal outlook and current situation. This would make sense, especially in light of the lack of interest from foreign central banks for US debt.

Now -- no one is going to come out and say they have lost confidence in the US' financial situation. Instead they will simple go on quietly selling dollars. And there is no guarantee that Greenspan's analysis is right. But given the above information it makes a great deal of sense.

Comments

[mbaty]

It's obvious that this administration and the financial powers that be in America do not view debt as anything to be concerned about. They act like the deficit isn't real..and wonder why so many Americans are in debt. So while the debt game plays out on all these levels, it's no wonder people are withdrawing when it's clear that the higher-ups have no intentions of fullfilling their debts anytime soon, and probably not in their lifetime.

[WIpatriot]

Hale,

I think "Bonddaddy" would be a cooler nickname...LOL.

[fact finder]

If I had a gazilliion dollars I would not but U.S. debt. Why buy a JUNK debt that will never be paid.

[NoPCZone]

1- I hope your retirement isn't tied up in paper financial instruments that are not backed by real assets.
2- I hope you are reasonably liquid, for I think that will be key to avoiding the ugliness to come.

I don't know how much longer Wall Street and the Treasury can keep doing the equivalent of paying the MasterCard bill with a Visa cash advance, but eventually the bill will come due. When it does the pain will be severe, widespread and probably of significant duration.

2 Words
Get Liquid

[Fotografen]

That will mean that we are absolutely better off borrowing from ourselves than we would be if we were borrowing it all from the private sector or
www.stilbild.nu

[Sundialsvc4]

Let's re-work those graphs to standardize against the constantly-falling value of the currency in question: The United States Dollar.

It's a raw-deal for any businessman whose enterprise depends on credit and futures-contracts to make a deal in Dollars when the value of that Dollar will change so much between the time that the contract is issued and the time it must be fulfilled.

It is, therefore, only a matter of time (and probably not much time) before the Dollar ceases to be the world's reserve-currency for Petroleum ... which is what's maintaining the Dollar's value. It makes no business sense right now. As the country's bare derrier continues to be more-and-more exposed on the world's military stage, the threat of armed retaliation ceases to be a credible deterrent. Businessmen large and small cannot afford to lose their shirts while trading with America.

[ThomH]

Strange that no one is commenting on Hale's thesis: we have been financing the Bush craziness with US bonds sold to foreigners, who are starting to balk at buying them.

Stranger still that the SS Trust Fund assets--US Govt. bonds--are dissed as "worthless iou's" by right wingers up to the president, but somehow they expect China to treat our bonds as real assets and keep buying them. Why aren't those bonds also just "worthless iou's?"

Finally, blaming the upcoming debt crisis on the "tax and spend libs" is belied by a glance at Hale's first chart. Only under Clinton did the rising debt curve level off.

But the Clinton "surpluses" are misnamed by the media, by not counting the SS Trust fund surplus as debt, which indeed it is. Hale, please help get this straight.

[mrcontinental]

That's because we all know since that stopped reporting M3 numbers they've been printing dollars with reckless abandon and spending them like drunken sailors ThomH.

It's no secret that the world at large is ready to give us the boot as money manager seeing how our current system of "paying tribute to Caesar" by giving us the money to buy their stuff is really getting old and better systems are available that can address the needs of the world at large and not just 1% of the america.

[personallydisinterested]

There is no wall that will be respected, no communal price too high. We have accepted the ethics of the third world and will eventually join them economically. The tragity is that every new crisis will lead to an ever greater bleeding of the system for every new crisis requires an expensive cure that won't work. The people destroying this country and cashing in our chips don't care how low the dollar goes they only care about how much wealth they can pilfer. The reasonable and well educated among us continue to rely on the pendulum to swing back once we reach some stupid extreme...it hasn't happen and wont. There is always a lie that told often enough makes the ridiculous acceptable. We don't have to be convinced, only confused into inaction. Our economy will be increasingly taken over by the government and handed over to the corporations that launder the money that makes the politicians rich and keeps them in power. Perhaps our system is a little more complicated than Mexico's but the result is and will be the same. There are plenty of well educated Mexicans that get it...but they can't stop the corruption. Can we stop the corruption when it is disguised by war and a healthcare crisis? No. The democrats and the republicans are both owned by the same people because those people aren't political, they simply want to control the country and it's money. That is why we aren't going to get out of Iraq until 2013. But saying that is only preparing us for the idea of being in Iraq until 2017 and so on. Everyday we are more and more desensitized to the ridiculous, stupid and dangerous.

[mrcontinental]

For someone who claims to be disinterested you're quite perceptive when it comes to the problems that ail this country. Nice post.

[realitytrumpsbull]

I think that's actually really positive, because
it'll put some people in the position of running
up hard against some concrete spending limits.
Long overdue for that, put DOWN the Big Magic
Checkbook, and slowly back away...

[WIpatriot]

Hale, great post, as usual. I look forward to your posts as an amateur economist.

However, I don't buy the global economy schlock that our mutual friend, Alan Greenspan, espouses. At least he admits he's a globalist, but he continues his "econo-speak" as if the BIS, IMF and Fed were REALLY trying to honestly manage the economy for the sake of the world's citizens. It is to laugh.

[sa]

i don't know economics.
but i do have a general instinct
on such things.
numbers and what not.
tenable situations, no longer tenable.
the center will not hold.

it seems, inevitably, that the
shiite is about to hit the fan.
this illegal war will play out with
all its karmic implications
and sink america (really, how could it not?)
for all its hubris and corruption
that allowed this
embarrassment in chief: bush.

america, get ready, you've earned
what is to come...

[wldnswmmr]

Bukowski couldn't have written it better. I think you would answer Hale's question by replying we've not only hit our fiscal debt limit, but our karmic debt limit as well.

[JoeBlough]

It seems like every time Bush feels underappreciated by Poppa Bush, he asks and gets from Congress 50-100 Billion a throw. I keep wondering just where is all this new found money coming from. Now I know. They just print up what they need and the total outstanding dollars just become more worthless. We are all in for a bad fall, but then we voted for this Administration.

[WIpatriot]

I don't blame Bush for starting the fire, but for pouring gasoline on it and fanning the flames.

I'm not buying this "we voted for this administration" and 'we get what we deserve' crap. Stupid people get the same number of votes that I do, and there's obviously more of them than us.

[nomoredead]

Its almost like Osamas wish came true and he succeded in bringing down america with a couple of hijacked planes. cost= a couple of thousand ?

[mpgarr]

I think it is well past time that this house of cards collapses and we have ourselves one hum dinger of a Worldwide Depression.

We sure need to suffer one here in the good old US of A--

It might be good in that it would slow our use of fossil fuels when economies grind to halt--and it might make us as people better---provide us with one big dose of humble pie--and make pull us together or at worst--we would just all kill each other off.

The end of the human race would be a good thing for the rest of the planet--we are a pretty destructive species--I once heard us described as an "invasive weed."

Let's have us one big nasty ass depression. It's probably the only thing to make us wake up and smell all of the rotten cups of coffee we have sitting on the table.

"Hey Bro, can ya spare a penny?"

[peaceandfreedom]

mpgarr--

In perverse sort of way, I agree with you. A Darwinian shake out of epoch proportions...

My only problem with it is, at the end of it all, it's till gonna be "Meet the New Boss--Same as the Old Boss!"

While we are doing the starving, they will be living like the Rockefellers.

[mrcontinental]

Like Britain and Rome before it, the US receives nearly free goods from its colonial empire. Rome and Britain did it through taxation and forced "tributes," while the US does it more cleverly by controlling and printing the world's senior fiat currency. This allows the US -- unlike any other nation -- to run persistent trade deficits (import surpluses) without suffering currency depreciations or raising interest rates. As Bernanke has reminded us, we have a technology called a printing press, and we put it to very good use. America's colony nations such as China, Japan and Taiwan pay huge "tributes" to the US in the form of massive treasury bond purchases. These tributes ensure market access to the Imperial center for the colony's manufactured goods, while also helping to stabilize the empire's fiat currency.

The colonies are growing restless and are poised to replace the master by beating them at their own game. The economic revolution is not far behind folks. History ALWAYS repeats itself.

[wldnswmmr]

Just a query to my more intelligent co-posters, who might know what I don't: the Fed stopped publishing the M-3 money supply in March 2006. The M-3 includes the "Eurodollars" held in UK banks, specifically. Recently the largest buyer of U.S. debt has been the U.K. It seems remarkable that the U.K. would suddenly find itself awash in surplus cash. Is it from its sale of Rolls Royces in the U.S.? Or is it finding the money somewhere else?

[EinChicago]

"Just a query to my more intelligent co-posters, who might know what I don't: the Fed stopped publishing the M-3 money supply in March 2006. The M-3 includes the "Eurodollars" held in UK banks, specifically. Recently the largest buyer of U.S. debt has been the U.K. It seems remarkable that the U.K. would suddenly find itself awash in surplus cash. Is it from its sale of Rolls Royces in the U.S.? Or is it finding the money somewhere else?"

The UK has been the main beneficiary of the credit/financial markets boom of the 2000s, much as the US was the beneficiary of the dot com boom. London has been brokering most ot the deals of the past half decade, with wall Street playing second fiddle. And, unlike the US, the UK anbd UK companies have been quietly using those proceeds to actually purchase assets, such as gold mines in the US, while the US has been not-so-quietly selling off all of our physical assets.

[peaceandfreedom]

Hale--

I'm a fan of your economic intellect, but have a real problem--maybe you can help?

As another poster down the line here says--Liberal vs Conservative, blah blah blah....truer words were never spoken!

LISTEN UP PEOPLE--AS CLINTON SAID, IT IS THE ECONOMY, STUPID--BUT LETS STOP WASTING OUR TIME ARGUING ABOUT TRICKLE DOWN VS MONETARIST VS WHATEVER!

THERE IS A DEPRESSION COMING OUR WAY! AND WE--ALL OF US--WILL BE THE SHIT THAT HITS THE FAN.

I WANT TO KNOW HOW THE WEALTHY ALWAYS COME OUT AHEAD. HOW RIGGED IS THIS GAME? HOW MUCH ADVANCE KNOWLEDGE OR CONTROL DO THEY HAVE?

AND MOST IMPORTANTLY--HOW CAN I PROTECT MY FAMILY AND WHAT LITTLE I'VE GOT? I WANT ANSWERS, GODAMMIT, NOT MORE ENDLESS BAYING AT THE MOON.

YEAH, THIS IS IN CAPS, I'M HOLLERING AND I'VE NEVER DONE THIS BEFORE. BUT TRUST ME, BUSH ISN'T DONE WITH US YET. AND WHILE YOU ALL COME OUT TO ARGUE FINANCIAL NUANCES, WE ARE GETTING BENT OVER FOR THE FINAL REAMING.

ANSWERS---I WANT ANSWERS FOR THE WORKING MAN!!!

[wldnswmmr]

Well, I could take a shot at answering your question, peaceandfreedom, because that's a great name and reminds me of the invention of that political party while I was an undergrad at Berkeley. The protective strategy for the coming financial meltdown depends on your financial wherewithal, but a good place to look for guidance is at Cheney's diversifcation, which was published not long ago. His estimated $100 million is invested apparently to the tune of about 70% in "foreign currency denominated assets." So this great patriot who wears the flag on his lapel knows that the US is a shaky foundation for his descendants' estate. Although he says that deficits don't matter, his investment strategy suggests otherwise. The American people, in their blithe innocence, elected a pair of "folksy guys" they'd like to drink beer with, ignoring the reality that they are supreme corporatists who intend to privatize as much as possible using U.S. tax revenues as their seed money. Thus, the Afghan and Iraq wars, which have nothing to do with their putative rationales of spreading democracy and fighting terrorism, are actually about funneling tax dollars into military contractors (enriching Carlyle, et al) and the huge group of private contractors who do all the related functions, such as Bechtel, Halliburton, Blackwater, Custer Battles, etc. This is the purpose of the Iraq War for now, although the oil contracts are the ultimate purpose, not yet achieved. The corruption at the top is a sign those most in the know are aware the system is bankrupt and rotten to its core, and they are simply using the system to shield themselves from the fallout of their own policies. Unless you operate at their level, there is no effective way of protecting yourself from the system we're trapped in, and the election of someone else in 2008 is not going to make a substantive difference unless "radical" changes are implemented, and that cannot happen in America.

[WIpatriot]

Dear P&F, and Craig, and others,

The reason you won't see a one-size-fits-all answer to your question is because there isn't one. You have been presented with facts and many people have described their vision of the future, but you are asked to THINK and come up with your own answers given the likely situation.

Assume your income remains flat, and inflation means goods cost more every month. The cost of gas is rising past $4, then $5, and so on. What would you do in that event? Less driving? Get a car with better gas mileage? Better do it sooner than everybody else, because the cost will be out of sight if you keep waiting. What if you lose your job? Can you find another one, or can you re-train for another? Remember, probably a lot of people are going to be in this situation.

When gas goes up, food that is trucked on average 1500 miles is going to go up, too. Somebody suggested planting a garden. That is about the most universal answer you'll get.

If I told you to convert your assets to gold or platinum, would/could you? If you're a stock market junkie, buy water and energy stocks. If you suscribe to the Alpha Theory, start to stock up on things you will need.

Become as self-sufficient as possible, now. Divest yourself of things that won't have value in the future world. Pay off your debts as much as possible, if you are concerned about income in the future. Learn a skill that will be of value in a post-peak oil economy.

There are plenty of books out there to read. Nobody is going to give you a personalized answer.

Get busy.

[PlanetKansas]

I feel your pain PeaceandFreedom, and the answer to our problems are very simple: Raise the taxes to cover our spending and debt. Just like everyone should do with their credit cards, the USA has to grow up and manage its own household.

A second solution is to reverse the trend of privatizing government. Not only do we have to pay contractors more so they can make a profit, we are losing the very bureaucracy that keeps things running, impartial and true to the service of the country. The private sector only cares about profits, so why are they providing 30% of our government services?

Of course, this won't happen, as the legacy of the Reagan Revolution is a hatred of taxes and a mistrust in government being able to solve our problems.

The left hasn't helped this debate much either, because they use voodoo economics to pay for national health care, global warming and a cure for AIDS as if they would all come free to us without more taxes.

[PlanetKansas]

Great Post Hale

I would call most HuffPost readers thoughtful and educated, but their focus tends towards the war, the presidential race (going on 3 years) and global warming, but very little to the economics of the rising US debt, the demographics of the coming baby boom retirees, and the declining tax base to support any increase in government programs.

Perhaps economics is the pursuit of eggheads and hard to get emotional enough to organize marching protests, but the national debt is going to eat our lunch in a very big way in the next 20 years and has the potential of causing a worldwide economic collapse.

The Iraq war is just a blip on the debt, while the debt will DOUBLE when the baby boomers begin collecting their SSI and Medicare.

Leveraging China, OPEC and third world dictators to buy our debt has its limits, and there is only a finite amount of cash to invest. If they pull out, and they will someday, our dollar will crash, and the world will plunge into a depression like never before.

Plain and simple, it you want wars, national health, prescription drugs, education, and environmental control, raise the taxes to pay for them all.

[olephart]

It"s the interest on the interest that will be the final nail in the coffin. Mathematically, the interest on the money borrowed to pay the interest on the debt will cause the total debt to increase geometrically, thus bankruptcy. Foreign Nations looking at their Foreign Currency Reserves and seeing the potential for huge losses will at some point cause a run for the exit. No one will want to be left holding the bag. The problem they will face is what to do with all the paper. We now are seeing a trend whereby Nations are setting up Sovereign Investment Funds to purchase hard assets, including productive assets, as a means of reducing their dollar holdings. Thus for a period we will be forced to sell our fixed assets to cover our borrowings. Because of the Republicans penchant for deficit spending, several trillion dollars worth of this Nation will be lost to foreign ownership.

An immediate problem will occur if Foreign Central Banks cease buying our debt. The laws of supply and demand will dictate that the rates paid to sell the bonds will rise. Rising long term rates in a slowing economy is not good. The Fed has few bullets left to combat recession. Lowering interest rates will put even more downward pressure on the dollar, as was recently seen. The traditional demand side stimulus is already in play in the form of the existing deficits and cannot rationally be increased without increasing an already unsustainable deficit. Further complicating the issue is that in a slowing economy, revenues decrease which will increase the deficit and the supply of bonds that will cause and increase in interest rates which will slow the economy. A slowing economy will cause the value of stocks to decrease. At some point Foreign Investors will purchase even more of our assets at fire sale prices using cheap dollars. The equilibrium point will be where our assets have lost what little value they once had because the economy has slowed to a non profitable pace and the few profits are denominated in worthless script.

The End.

[Mormondude]

Most of the interest is money that we owe to ourselves. It's all accounting tricks. At some point the SS/Medicare and the general budget will be unified and the point will be moot.

Which also means that we are absolutely better off borrowing from ourselves than we would be if we were borrowing it all from the private sector or foreign governments.

[olephart]

"Most of the interest is money that we owe to ourselves."

If you examine the graph of outstanding debt owned by the public you will see that it makes up 56% of the total. About 30% is owed to Social Security and the remainder is either monetized or held by other Government accounts.


"better off borrowing from ourselves than we would be if we were borrowing it all from the private sector or foreign governments."

By borrowing from ourselves do you mean printing money? We can"t borrow from the private sector, we have a negative savings rate. For an example of printing the debt see Wiemar Republic, 1923.

[CharlesMac]

"It"s the interest on the interest that will be the final nail in the coffin."

Bong!

Annual debt service on close to $10 trillion, let's say, $500 billion? One sixth of the annual budget? They can rearrange the spending and debt chairs on the Titanic, but they are going to have to borrow.... more.

All I can think of is how, during Reagan's Supply Side Part I spendathon, Japan couldn't find their wallet until we made major trade concessions. Since then, they can sell TVs and cars in the US, and we can't sell a head of lettuce there. We are going to lose more than assets during the fire sale.

Meanwhile, the final delusion of prosperity is about to go. The $1 trillion of resetting mortgagees next year are going to need cash to settle (up). Net quick cash. Unless they are going to sell their cars off of their front lawn, the portfolios they have been using to rationalize their debt, are going to be cashed out.

According to the zillion pundits, if the company isn't a multinational high-tech corporation which pumps oil, provides healthcare, and makes warplanes, its in a bad sector. And they are probably right. This isn't a tentative bull run, it's a lemming run.

We all have been wondering which one of the economic wobbling weebles would fall first and take the rest?

They are all going to go at once.