The World is Turning Its Back on America’s Debt

Treasury Bonds Are a Bag Nobody Wants To Hold

Well, this is discouraging…

Yahoo Finance reported last week that “Nobody wants U.S. Treasury bonds.”

Per Yahoo:

Once a symbol of America’s economic might and accepted as a global coin of the realm, [U.S. Treasury bonds] have fallen badly out of favor, with serious consequences for taxpayers, investors, and financial markets.

The emphasis is mine. Because that’s the crux of today’s dispatch.

I’ve been saying for many a month now that Uncle Sam is mindlessly hop-scotching his way toward a fiscal crisis by way of his drug-addled reliance on way too much debt… that proponents of debt reliance are, for lack of a friendlier term, financial morons… and that, in the end, this stage of American capitalism/fiscal governance is going to end about the same way the Great Depression ended the Roaring Twenties.

But let’s move past those facts to focus on those words I emphasized in the Yahoo Finance report.

Governments rarely face serious consequences for anything they do, no matter how ignorant and wrongheaded their actions typically are. Governments just paper over the consequences and insist that we all just move along because there’s nothing to see here.

But for us average, ordinary, everyday Americans—we do face the consequences of government run by ivory tower elites who can buy their way into a sheepskin from Harvard or Yale or the University of Chicago and Wharton, but who cannot logically string together two cogent sentences (that aren’t packed with BS, obfuscations, and outright lies) to explain why they run the country with all the fiscal aptitude of a five-year-old in a candy store, his first allowance burning a hole in his pocket.

Here’s what happens when demand for Treasury paper wanes…

2. Interest rates rise.
   
3. I’m not talking about the interest rates the Federal Reserve sets. I’m talking about the interest rates investors demand in the bond market for buying the debt of an egregiously overindebted sovereign nation.
   
4. The bond market is run by investors. If they sense elevated repayment and/or default risk, they demand higher interest rates on the bonds they buy. For decades, U.S. Treasuries were a risk-free investment. Everyone everywhere in the world knew that Uncle Sam’s IOUs were as good as gold.
   
5. Only now they’re worried that maybe U.S. bonds are fool’s gold.
   Bond-rating agency Fitch lowered the credit quality of U.S. debt to AA+ from AAA back in August (AAA is the highest). The rationale: The Fitch pooh-bahs “expect fiscal deterioration over the next 3 years.” Moreover, Fitch said at the time that the downgrade “reflects its view that governance on fiscal and debt matters has steadily deteriorated over the last couple of decades.”
   
6. Translation: The carny clowns in Congress are such a dysfunctional band of low achievers that Fitch can foresee a day when politicians allow the U.S. to default on some of its $34 trillion in debt. That would rock global markets from New York to New Delhi.
8. Costs go up.
   
9. As interest rates rise in the secondary market for bonds, investors demand higher rates on new bonds the Treasury Department must sell every month to keep the lights on at home. Those bond sales—known as auctions—are what Yahoo is referring to. Fewer and fewer buyers are showing up to buy Uncle Sam’s newly issued debt at monthly auctions.
   
10. Why buy a new bond at, say, 4.5% when you can buy an existing bond of the same duration for 5% simply because the seller is eager to get out? (Selling pressure pushes the value of a bond down, which raises the underlying interest rate.) Buyers of new debt are smartly demanding they be paid higher rates.
    
11. But higher rates just add to America’s annual expenses by driving up debt-repayment costs.
    
12. For the fiscal year 2023, the White House budget goobers originally projected the U.S. would pay north of $400 billion in interest payments for the year. The real number was north of $700 billion.
    
13. Fiscal 2024, now underway, will see even higher borrowing costs.
    That pulls money out of the productive economy, and out of financial markets, which impacts all of us ordinary Americans because it diminishes what little nest eggs most folks have. It also means…
15. Higher tax rates.
    
16. At some point, taxes will go up, either overtly or covertly.
    
17. There really is no other way.
    
18. The U.S. has limited options. We can’t grow the world’s largest economy at some blistering pace that generates unexpectedly large tax receipts from business. And if we did, you can bet politicians would immediately look to cut corporate tax rates in order to feed their masters. If nothing else, they’d certainly not use the windfall tax receipts to pay down debt. They’d use it for some boneheaded pork-barrel vote-buying like, say, a billion-dollar, maglev, high-speed rail project between Green Bay and Appleton, Wisconsin.
    
19. And we certainly can’t cut spending.
    
20. I mean, sure, we can cut spending. But when’s the last time that happened?
    Higher tax rates on the hoi polloi is the only solution politicians will accept, though each side will insist the other side is responsible.
22. Inflation remains high.
    
23. Inflation is a monetary phenomenon tied to too many dollars in the system chasing the same amount of goods.
    
24. Given that Uncle Sam lives by the graces of deficit spending and given that deficit spending demands the government print more and more dollars to afford ever more debt repayment costs, an ever-increasing supply of dollars sloshing through the economy is the logical end result.
    
25. That’s inflationary fuel.
    
26. Mind you, that doesn’t mean inflation goes up again tomorrow.
    Lots of levers push and pull at inflation, and all of this takes time to filter through the economy.
    
27. But filter it does.
    
28. And in the end, American families face ever-higher costs across much of their lifestyle.
    
29. So, yeah, that’s what Yahoo Finance means when it says, “Nobody wants U.S. Treasury Bonds.”
    
30. The bond market is quickly realizing Uncle Sam is in a helluva fix, and no one wants to be left holding the bag when it explodes.