The U.S. debt position increasingly has all the hallmarks of a Ponzi scheme. The Daily Treasury Statement that was released last Wednesday afternoon as Americans were preparing to eat turkey on Thanksgiving revealed that the U.S. Treasury has been forced to issue $1,040,965,000,000 in new debt since fiscal 2015 started. This is just eight weeks ago. they had to do this in order to raise the money to pay off Treasury securities that were maturing and to cover new deficit spending by the government.
During those eight weeks, Treasury took in $341,591,000,000 ($341 billion) in revenues. That was a record for the period between October 1 and November 25. But that record $341,591,000,000 ($341 billion) in revenues was not enough to finance ongoing government spending let alone pay off old debt that matured.
A conservative measure of the U.S. National Debt to GDP ratio is now around 103%. The talking heads have, for many years, downplayed the out of control spending of successive administrations with the justification that it was below the “psychologically important” debt to GDP ratio of 100%.
Well, here we are now over 100% and all is quiet.
The Total U.S. Debt to GDP ratio is now over 300%. Such debt levels ordinarily give rise to debt crises and currency crises.
So how can we expect this scenario to play out? If it hasn’t mattered thus far why should it matter now? Well for one, U.S. government profligacy has been protected by the extraordinary status that the dollar has enjoyed as a reserve currency since the early 1970s and Nixon going off the Gold Standard.
Heretofore, almost all balance of trade deficits have been settled with dollars. All oil transactions have been settled in dollars. This has allowed the U.S. an “exorbitant privilege” in the words of Valéry Giscard d’Estaing, the former French Minister of Finance. It has allowed the U.S. to live beyond its means because its currency remained in demand regardless of its economic performance.
Over the course of this year, however, the dollar has taken what should be seen as an alarming series of blows to its status as trusted sole global reserve currency as currency wars intensify.
Increasingly, the new power bloc that are the BRICS nations are settling their trade deficits with domestic currencies, by-passing the dollar. Russia and Turkey have just signed a gas-line agreement to this effect. As have russia and the emerging superpower China.
There is a perception that the U.S. dollar is still strong and is still the reserve currency of choice.
This is based on the strong performance of the Dollar Index as of late. It is important to note the distinction between the dollar and the Dollar Index. The index rates the dollar relative to a basket of other mainly western currencies, primarily the euro. The recent “strength” of the dollar is merely strength against these other struggling currencies including the euro.
Russia’s foreign minister, Sergei Lavrov, pointed out last week that “the seven developing economies headed by BRICS already have a bigger GDP than the Western G7.” This drives home the message that the economic might of the U.S. is waning. It is doubtful whether it will be able to re-establish or indeed maintain the Bretton Woods paradigm which gave the dollar it’s preeminent status.