November 28, 2008: America's financial crisis and
a recession looming on the horizon have some European analysts
wondering whether buying U.S. treasury bills may become a
high-risk loan. America's national debt has doubled in only
eight years to total 10.65 trillion dollars. If corporate and
private debt is included, the United States is awash in
nearly 50 trillion dollars of debt. (The amount is even larger
if as yet unfunded benefits already earned in the U.S. Social
Security System are factored in.) The U.S. government is now
making interest payments of 19 billion dollars a month to
its creditors – more than 200 billion dollars a year.
The current crisis will only see America's debt situation
worsen. The national debt figure does not include the 700
billion dollar bailout fund approved by Congress in September.
During the current quarter U.S. Treasury Secretary Henry
Paulson needs to borrow 550 billion dollars, and Scott Minerd
of Guggenheim Partners predicts that America's budget deficit
for 2009 will run as high as 1.5 to 2 trillion dollars.
Some wonder whether America's growing national debt makes
the country a credit risk. According to Pierre Nahm, an advisor
for hedge funds, the U.S. won't go bankrupt because a country
has the option of simply printing enough money to pay its debts.
In so doing, inflation takes its toll on the debt, and debtors
would be repaid in devalued dollars.
Creditors apparently think that America will not swallow
her wallowing debt so easily. The rate of "credit default
swaps" (CDS) for U.S. treasury securities increased fourfold
after the 700 billion dollar bailout was passed. In other
words, the risk premium for 10 million dollars of treasury
securities increased from 10,000 to 40,000 dollars, reflecting
less confidence in the U.S. government's ability to repay its
America's debt problem has some experts wondering if
the Secretary of the Treasury doesn't influence the credit
ratings of agencies like Moody's. Moody's continues to
give the U.S. government high credit ratings, when the
growing national debt – especially with the current
financial crisis – would appear to warrant a
reassessment. However, any downgrade would likely
contribute to an increased lack of confidence in the
U.S. government as a debtor.
For the time being, it seems that America's largest
creditor nation – China – has no choice but
to continue to invest its dollar earnings in the United
States. European bond markets are currently too small
to absorb the amounts that China wants to invest. Any
sudden move by the Chinese to move assets into other
currencies would lead to a devaluation of the dollar –
and China's substantial currency reserves held in U.S.
dollars. As long as the price of oil on world markets is
pegged to the dollar and the Chinese continue to hold their
dollar-denominated assets and invest in U.S. treasury
securities, the United States will be able to keep running
up the red ink. However, if either if these two factors
changes, the dollar is in for rough times, and along with
it America's ability to finance its huge budget deficits.