U.S. Debt - It's Not Going Away

The markets are running the dollar on sentiment right now, and seem to be ignoring the fundamental reality of increasing jobless claims, lower income and savings, and ever increasing government and public debt levels, says Terry Crawley, a retired institutional bond trader. When the markets are fueled by optimism it does not take too much to set dollar-protection buying into a momentum move that will then feed of itself. The real key to all of this holding is for the U.S. not to print economic releases below the expected number, even if those expected numbers are poor, he says.

"So long as the economic releases are above the expected number, they may be enough to sustain the dollar buying" says Crawley. "With the U.S. economy finding a way to print 'as expected' growth numbers going through to the end of 2008 in GDP (Gross Domestic Product; the value of all goods and services within an economy) and ISM (Institute of Supply Management; the most influential of all non-government related surveys) releases, and at the same time reducing the housing inventory levels from the current eleven months via mortgage rates dropping for the first time this year, it is likely to lead to the dollar continuing to get bought" he says.

"As the overseas holders of Usd denominated debt step in to protect their investment from a falling dollar, thoughts then turn to sustainable appreciation in the U.S. currency if other global regions are not pushing forward themselves. If banks start lending and the economy stops contracting, then debt levels become nothing other than a hindrance to be dealt with at some stage in the future." It is something that has been seen time and again, and it is widely accepted now that the U.S. debt mountain is nothing more than a permanent mortgage that will not ever get paid off, says Crawley.

"Until the overseas regions that back the other side of the Usd currency pair show growth, that is how it will stay." Crawley says. "A stronger dollar will impact the U.S. trade balance in a negative way, but that may be off-set by the fact that a sustainable increase in dollar values will start to decrease commodity inflation. The U.S. economy will grow if banks start to lend, both to themselves, to corporations and to the public. Negative thoughts of the reality of U.S. debt will be replaced by market momentum until a central bank overseas shows growth above the expected."

In an explanation of how the U.S. debt mountain can be easily ignored in the near-term, Crawley adds "However much we read, see, and hear of the negative impact of the amount of debt that the U.S. has issued, we have to remember that as much as was issued has actually been bought. Some of it was forced purchases of reserve currency by central banks, and corporations, but a lot was taken as a matter of choice by investors and overseas wealth funds. U.S. debt is viewed as safe, but most of that U.S. debt has been bought at much higher values than the current dollar price. As such most overseas dollar reserves are at a negative local currency/Usd value from where it was initially purchased. It is not unreasonable therefore that those holders of Usd denominated debt to want to keep their reserve values up, or at least protect the downside, whenever the chances arise, and that is done by buying more dollars".

Comments

[Alex Filonov:]

I would agree with the article, if US was the only country deep in debt. Governments of most developed nations are deep in debt, some are much deeper than US (Italy, Japan). So we'll live. Happily ever after.

2008 Sep 08 01:44 PM

[otbricki:]

Muddling is right. It's all relative, and we are all going down the rathole together.

2008 Sep 08 01:47 PM

[huangjin:]

Ditto. Compared to real assets, the dollar will devalue, but too many Americans forget that the EU, Japan, and even China (if you assume the bad debt at state owned banks will end up on the government's balance sheet) are in worse shape due to demographics.

2008 Sep 08 03:27 PM

[iceberg17:]

May I suggest UUP Powershares as a way of taking advantage of the rise of the USD. It appears based on today's news that we all know what we are up against. Dr Doom is wrong, USD is not going to zero...at least not yet!

2008 Sep 08 03:29 PM

[huangjin:]

UUP is good, but I think the euro is more overvalued than the dollar is undervalued, so I hold DRR.

2008 Sep 08 03:50 PM

[phdinsuntan...:]

I been in many elections in tropical places, currencies
use to have a rebound in those times, make your own conclusions...

2008 Sep 08 03:54 PM

[Socialism c...:]

Um...I'd skip the UUP! Mortgage rates are being forced down, and that also pushes the Fed rates down, implicitly...they will be forced to follow with that in short order! Dollar heading down on that. Gold = good.

2008 Sep 08 04:42 PM

[Alex_G:]

Muddling, you've stumbled upon the "we suck less" theory. The Euro Zone has wrung all of the efficiencies out of the creation of a common currency and loose borders that can be acheived, so the 10 year economic upcycle is over. They also have less options to stimulate and their social net commitments will increase their financial strain.

2008 Sep 08 08:44 PM