MOSCOW, 15 Jun 2021, RUSSTRAT Institute.
The liberals’ belief in American global superiority is based on the belief that, whatever world changes there may be, the US dollar will remain unconditionally attractive forever, as well as on confidence in the Fed’s ability to print them in unlimited volumes.
The basis of this position is history. For example, the GDP of the European Union at the end of 2020 amounted to $15.167 trillion, which is 7.1% less than the same indicator a year earlier. I.e., in fact, the European economy rolled back at least four years ago, losing at least $1.15 trillion. The United States closed 2020 with a GDP of $20.93 trillion, just 414 billion below the level of 2019. What is not a proof here of the superiority of the American economy in efficiency?
And the fact that for this same period of 2020, the Fed printed $9.6 trillion to finance anti-crisis measures, so this, on the contrary, shows that the United States has an undeniable advantage. Who else in the world, solely with their own desire, can get “out of thin air” money in the size of 44.9% of their own, 63.2% of the European, or 653% of the Russian economic volume? In addition, any other country, if it printed so much, would inevitably collapse into hyperinflation, while America continues to live as if nothing had happened.
So, in general, “we should strive to live like America” instead of trying to look for some own ways and strive for some kind of independence.
A little bit more intelligent commentators agree that there are no miracles in the world. Everything has its own price, even the ability to supposedly endlessly build up debt. It’s just that Washington has an unsurpassed talent for turning everything to its advantage, including its own defeats.
By 1980, the US government had accumulated 120% of the national GDP in public debt. But then the USSR collapsed, freeing up for Western, primarily American, companies a huge amount of “Soviet heritage” “for development”, both in the countries of the former socialist camp and as well in the former Soviet Union. This allowed to dramatically increase the scale of the US economy and without any problems to increase the national debt from 0.909 trillion in 1981 to 5.62 trillion dollars in 2001.
The main American trick is to successfully use the dollar as the world’s main reserve currency. Among $13.5 trillion of US government debt in 2010, nearly $12 trillion (88.8%) were held by foreign (public and private) borrowers. Having enduring reputation of the world’s largest, fastest-growing, and richest economy, America was selling with willingness its debt as the most reliable foreign-exchange reserve instrument on the planet. At the same time, shifting nine-tenths of the inflationary risks and problems “abroad”.
And since the world economy has always outperformed the purely American one by several times, it seemed that this process could last forever. The size of the US external public debt in 1990 ($3.2 trillion) was only 10% of the total world GDP. Over 20 years, by 2010, this figure had grown 4.21 times, up to 13.5 trillion, but still remained within 15.1% of the total world GDP. After another 9 years, by the end of 2019, the US national debt reached 23.16 trillion, but in relation to the global economy, it increased almost insignificantly, to only 17%.
It would seem that the liberals are absolutely right. If to not take in account the fact that they rejoice for a strange thing – the success of the American parasitism on the economy of their country. For the rest, the figures “show that at this rate, America can successfully rot eternally.” The US federal budget spends 9% of its revenue on servicing the national debt. Thanks to the reduction in the Federal Reserve’s discount rate in March 2020 to 0-0.25%, the share of debt service costs in general fell to 7.6% of federal tax revenues.
However, on closer inspection, the picture does not look so good. And even not at all joyful. Thanks to the manipulation of the discount rate, the federal government still manages to maintain the appearance of stable success, but now it is increasingly necessary to live “on its own”. If 10 years ago in the hands of foreign borrowers was more than 88% of the national debt of America, by the end of 2020, their share has decreased to 33%.
However, something else is more interesting. The US federal debt has always been divided into external and internal debt. However, the share of domestic loans usually did not exceed 10-12% and consisted of debt obligations to state-owned companies (i.e., the state’s debt to itself) by about 3-5%, and debt to businesses (individuals, banks, investment funds) by 5-7%.
At the same time, the business was usually represented only by the largest financial structures. Now this part of the debt looks completely in different way: 30% is the debt of the state to state-owned companies, and 37% is private internal money, not only from the largest investment funds, but also from ordinary depositors and pension funds.
No, for a while, for the next five years, for the continuation of the debt game, America’s accumulated “internal fat” is still quite enough. Over the past 12 months, the federal budget has quite successfully placed new “treasuries” for $4.7 trillion, without causing the collapse of the dollar pyramid. But who bought them is already a very interesting question.
As it turned out, more than 3.1 trillion of this amount was bought by American commercial banks and individuals. Only 1.6 trillion “went” abroad. But if to look at the latest report of the Department of the Treasury on the structure of foreign debt, it turns out that over the same period, foreign borrowers reduced the amount of US Treasury securities available to them by 8.3% or more than $2 trillion. This allows us to draw two important conclusions.
Firstly, the “going abroad” dollars are actually bought up by the same American corporations, only through offshore wallets. So this is not “abroad” at all. Secondly, the “real abroad” is gradually getting rid of the dollar, thereby reducing the scale of the global dollar pyramid. Washington, of course, resists this trend and is looking for new creditors, and even finds them: India began to increase investments in the dollar in 2020, but the scale of its capabilities is far from being able to even cover the “falling volumes”.
In fact, this clearly shows the true motives for strengthening the American political and economic expansion in Europe. Let’s agree, the situation in which the second economy of the planet – China – “holds” 19% of the US external public debt, and the second largest global consumer market – the EU consisting of 26 countries “only” 12% – looks “completely unacceptable”. Even more so, it frankly looks horrible. Europeans must pay much more for democracy and protection.
But they don’t pay yet. Moreover, even such a “traditional pillar” as Japan reduces investments in the dollar. Because of this, the US is forced to accelerate the pace of eating through its own savings. And the scale of the process is growing exponentially.
For example, the size of the assets of American pension funds in 2017 reached $44 trillion, which is almost twice as high as in 2008. And in the first quarter of 2020, their assets lost $3 trillion, or 6.8% of their capital. According to American experts, in the event of the loss of about 60% of assets, the US pension system will inevitably collapse due to the guaranteed inability to fulfil its financial obligations. If the rate of erosion of the capital of pension funds in its current form continues for at least another 8-9 years, then by 2029-2030 there will be banally nothing left to pay pensions in America.
And there will be nowhere to continue borrowing from in the current volumes, too. Over the past three years, the US Treasury has been actively re-borrowing money to repay short-term obligations. To date, the share of treasury obligations with a maturity of up to a year has reached a third of the total structure of federal loans, although before the beginning of the 2010s it usually did not exceed 5-7%.
However, there is nothing surprising here. As a result of the expansion of the NIRP (as previously written by RUSSTRAT), the yield of thirty–year obligations fell to minus 0.31%, twenty-year – to minus 0.22%, five-year – to minus 0.46%, and even two-year ones bring to its holders minus 0.2% per annum. But “everything that is up to a year” has “green indicators”. Most of all, “Uncle Sam” needs money for a period of three months, and he is ready to take it at plus 27%. Six-month securities are placed at 6.84%, annual – at 4.78%.
The domestic financial market provides this money. Especially that in the context of NIRP, it has just a few options for positive returns. And the problems of pension funds are of little interest to it. But this is already a dead end, from which the American government is not able to get out with all its desire.
Over 60% of the federal budget is already firmly spent on numerous social programs. In the current political reality, however, it is impossible to reduce this part of spending, even theoretically. Of the remaining 40%, half goes to national security (army, FBI, CIA, etc.) and another quarter – to various other mandatory “government expenditures”, without which the existence of the United States as a state system is impossible.
Hence, it turns out that “for everything else”, from servicing the national debt to the NASA program, no more than 17-18% remains in the federal budget, almost 10% of which already have to be “paid for debts”.
Calculations show that with the size of the national debt at 140% of GDP (or 820% of the size of federal budget revenues), in the current external conditions, the aggregate interest rate on the US national debt should not exceed 1.2%. And since the money poured “out of thin air” over the past two years will lead to 1.6% annual inflation over the next 30 years, it turns out that during the same period, the Fed will not be able to cancel NIRP even if it wants to.
However, this is even good. The main problem of the “dollar pyramid” has traditionally been the total involvement of the economies of other countries in it. Relatively speaking, a complete national default of some Belarus or Poland, on the scale of the whole world, threatened only with a surge of journalistic reasoning in the media. While a US default on its debt would mean the imminent collapse of the entire global economy.
Now, as the dollar returns to America, the dependence of the world economy on it is decreasing. In 10 years, there is reason to expect it to become a purely regional currency. Who and how will replace the dollar in international settlements is a separate topic.
Here we can argue – perhaps the yuan, perhaps the euro, perhaps something synthetic, like Special Drawing Rights (SDR, 1 SDR is approximately equal to 1.5 US dollars) of the International Monetary Fund. The main thing is different – it will not be the dollar, the operating area of which will remain only the United States and, probably, the “American economic cluster” created by Washington, while all the others will trade with their own currencies. Consequently, a sovereign default of the US regional currency will affect them only marginally. This cannot but please.