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We know the fact is of a $438,000,000 deficit this year and the rest is sort of speculative, but, but can you see the US getting into a trillion dollar market and if so, how?
Well, we’re, we’re obviously heading into a very difficult time for the US economically. You are gonna see a drop in tax receipts, you are gonna see, uh, pressure on the government to use money that’s already been used to bailout Wall Street to help other, other constituencies in the US who’re also gonna be facing troubles. So if possible that we could see these numbers in fact…uh...
Get to those sort of level
Get to those levels
I mean is the US of the opinion like most of the rest of the world, the best way to tackle a recession now is to spend very freely, the so called Keynesian Economic Theory.
I think they are gonna have their hands tied, I mean you can spend a certain amount but on the other hand, already we’ve got a massive budget deficit, we’ve got a huge amount of money that the US owes the rest of the world. So they can only go so far in trying to spend their way out of this recession.
Ok. So as you point out, the US already owes the rest of the world a huge amount of money. There’s a ten-trillion-dollar national debt. Perhaps up to a trillion dollars coming up. The government will finance that by selling basically treasuries to other countries. Why should those other countries buy them?
Well, of course, the US is gonna be turning to the same usual suspects who have been buying US debt in the past. That’s gonna be China, Japan, investors in the Middle East. And the problem for them is that they are already on the hook for a lot of US debt they have purchased in the past. And so they face, what some people have called “the financial balance of terror”. If you decide that you are not gonna buy, US debt going forward, you risk shooting yourself in the foot by devaluing the securities that you already own. So in a sense you need to keep buying in order to keep your portfolio valuable for the future. On the other hand, the question may be at what price, what yield does the US government have to offer in order to attract these investors to continue financing the US deficit.
Do you think there is a growing concern though in the international community, a government level, that after they’ve heard the president say I will half the national debt by the time I leave office and in fact it’s going completely the other way, it’s now a record deficit and ballooning, that the rest of the world loses their faith in the US government’s ability to manage its own finances. So therefore they are gonna be saying we don’t wanna go near this.
Sure there is a, there is a real question of confidence that the government is gonna be facing, the new administration is gonna be facing when it comes into office and that will be a matter for the administration to address in terms of trying to bolster the confidence of investors, and in fact you have a new attitude, you have a resolution to try and address this. Nobody expects that the deficit is gonna to be balanced or addressed short-term because of the recession, but longer term, if people see and or at least have faith that the US is taking the right steps to address this longer term then that may that may do something to address some of these concerns.
You talk about that sort of balance of year, that balance of fear, that if they stop buying it, the value of the US dollar will come down. But all the same countries like China and Japan have the bulk of their overseas foreign reserves in these US treasuries, 90% maybe, maybe a bit less. But isn’t it removed to bounce , why don’t they buy euros, why don’t they buy yen, why do they keep wanting to buy the US dollar if there are so many problems associated with US dollar.
There have been discussions about this in the past and every once in a while you see a comment that suggests that China or Japan might be looking to diversify their exposure and opt to buying of euros or other currencies, and I doubt that you will see that go away. However on the other hand, what you’ve seen now with the financial crisis reaching Europe and the problems there and the need for governments to go in and bail out the banking system there with Europe now in a recession and possibly getting into a very serious one in the next year. What that says is that Europe may not necessarily be as much of a safer bet than the dollar
Bet them at what you know
Right.
