The Silent Problem: Foreign Creditors Are Bailing When The U.S. Needs Even More Money

Summary

• The U.S borrowed $488 billion in the first quarter - a new record.
• U.S. spending has increased 300% more than revenue growth - a worrisome rate.
• U.S. Treasury Secretary, Steve Mnuchin, says that he's "unconcerned" about all the borrowing and that the bond market can handle it.
• Unfortunately for him, there has been less foreign appetite for U.S. bonds - and he really should be worried.

The United States borrowed $488 billion in the first quarter of 2018 - a record high for this period.

That's only from January through March...

At this rate - over a full year - that's $2 trillion in more debt.

As I wrote a couple months ago, the rising debt is making the economy very fragile. Especially since all this borrowing is happening during non-recessionary times.

Making matters worse, the United States' spending increased 300% more than the growth in revenue.

And don't forget that interest payments due to service the U.S. National Debt is hitting new record highs...

One thing is for certain - borrowing is going to keep increasing.

"Tax and spending measures approved by Congress and President Donald Trump are expected to push the budget gap to $804 billion in the current fiscal year, from $665 billion in fiscal 2017, and then surpass $1 trillion by 2020, according to the Congressional Budget Office."

You might be asking yourself - like any sane individual - that this huge amount of borrowing is becoming unsustainable.

And you'd be right to do so.

But how does U.S. Treasury Secretary Steve Mnuchin - the man who's in-charge of the United States bank account - feel about this?

Well, he's not concerned at all about the rising debt or about the bond markets ability to absorb it all without sending interest rates soaring

"It's a very large, robust market - it's the most liquid market in the world [U.S. bond market], and there is a lot of supply," he said in a Bloomberg TV interview on Monday. "But I think the market can easily handle it… I'm not concerned about that. I think that there are still a lot of buyers for U.S. Treasuries," he said when asked about the risks of reduced demand for Treasuries and increased supply."

So, is his unconcern of all this increasing debt - and his assumptions that others will eagerly keep funding U.S. - correct?

No - and he's dead wrong.

Here's why...

Foreign central bank demand for U.S. government debt is declining.

Right now, foreign investors hold roughly 40% of U.S. government debt - the lowest since November 2016.

This trend has continued downwards since its peak at 55% during 2008...

Not to mention, the 'indirect bidders' of U.S. debt (these are mutual funds and foreign investors) are becoming less interested at the treasury auctions...

This is a recipe for disaster: declining foreign demand of U.S. debt at a time when the U.S. needs significantly more funding is worrisome.

But - there's something else making the situation extremely fragile...

The Federal Reserve is no longer monetizing the Treasury, which they did between 2008 - 2014 with their aggressive bond buying programs; known as Quantitative Easing.

Instead, the Fed is now actually selling bonds - Quantitative Tightening - which is sucking money out of the system.

This is the worst possible time for the Fed to be selling bonds - because as foreign demand for debt is declining, the Treasury will depend on the Fed to monetize the deficits eventually.

That's why I expect the Fed to reverse their tightening and restart their printing press - sooner than many expect.

Think of it this way - if you live in your lavish apartment but can't afford to pay rent with your own income alone, you will need to borrow the difference. But what if friends and family become less interested in lending you money?

You can see how that situation becomes hopeless - but thankfully for the U.S., they have a printing press at the Fed.

And without a doubt they will need them to help cover the growing difference.

Once the market starts opening their eyes and realizing this is the only option for the U.S. to keep borrowing vast amounts over the long-term, the dollar will suffer.

So, does U.S. Treasury Secretary Steve Mnuchin really believe that nothing is wrong?

How can he be so unconcerned about the United States' soaring borrowing - at a time when foreign lending is fading - all while the Federal Reserve is tightening credit?

I'm sure he must be worried deep down - very worried - but won't ever admit it publicly.

Because it's all about upholding confidence in the 'full faith and credit' of the U.S.

Even though in reality - things are becoming much more fragile than the market realizes...

Analyst’s Disclosure: I am/we are long GLD, GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The piece is from my original write-up at: Palisade-Research.com. All ideas expressed and charts are my own.

Comments

[michelf]

Mnunchin doesn't have the wherewithall mentally to understand micro and macro economic policy. If you look at every appointed individual in the last 1 1/2 years heading agencies, most have no formal education or experience to understand what they're doing. It's all about pleasing Trump and that should scare all of us.......

[David de los Ángeles Buendía]

Hello michelf,

Sec. Mnuchin is not making a financial statement but a political one. The Republican Party is has long held to a policy of cutting taxes to the wealthy, increasing spending, and driving up the deficit. He is simply saying that he supports the Republican platform.

[Gosh, Oh My!]

How can three different people come up with three different answers to what our Government should be doing in regards to our debt?
This in itself points to dire consequences.

[David de los Ángeles Buendía]

Mr. Tumerkan,

1) The Bid-to-Cover ratio (BTCR) for 30 Year United States Treasury (UST) Bonds is 2.4 in the first quarter of 2018[1]. While not gigantic, it is certainly healthy. The BTCR is higher for other shorter term UST securities, 3.0 or better for the UST Bills. This BTCR for the 30 year UST Bond is higher than in 2016 where it was 2.2 [2] as it is for some other securities. There is more than two dollars bid, in some cases three dollars, for each dollar offered by the UST. That does not sound a bad situation to be in for the UST.

2) You wrote:"Instead, the Fed is now actually selling bonds - Quantitative Tightening - which is sucking money out of the system."

The Federal Reserve Bank (FRB) is not selling any securities. What it is doing is not purchasing new UST securities as old one mature, that is to say they are no longer "rolling over" their current holdings. Those are two different processes.

3) You wrote:"The Federal Reserve is no longer monetizing the Treasury, which they did between 2008 - 2014 with their aggressive bond buying programs; known as Quantitative Easing."

There is no process of "monetizing the Treasury". The FRB purchased UST securities from banks in exchange for reserves. Banks exchanged one asset, UST security, for a different asset, bank reserves. This increased the liquidity of the participating banks but did not change their overall balance assets to liabilities.

[1] http://bit.ly/2FejuJW

[2] http://bit.ly/2HoUs0u

[EK1949]

The U.S. doesn't borrow dollars. It has a monopoly on their issuance. The demand for bonds comes from the dollars issued. They are issued, then bonds are sold. This is not borrowing. If it was, we'd have to issue bonds first, to "get" dollars. But we don't, we have to create the dollars by making payments first, then we can exchange the dollars for bonds for whoever wants them. Dollars created are the demand for which the bonds are the supply.

Somehow I'm unconvinced by the panic over simultaneous not enough and too many dollars circulating. Is it just me? :-)

[David de los Ángeles Buendía]

Hello EK1949,

You wrote:"The U.S. doesn't borrow dollars. It has a monopoly on their issuance. The demand for bonds comes from the dollars issued. They are issued, then bonds are sold. This is not borrowing. If it was, we'd have to issue bonds first, to 'get' dollars."

That is precisely what happens, the United States Treasury (UST) offers securities for sale and then receives dollars for those securities when they are sold. Successful bidders give the UST their dollars in exchange for their USDs. When those securities mature, the UST gives those holding those securities those dollars back plus interest.