The Collapse of the USA

Dragged down by Debt

I have put off my report on where I’m investing till next week, always assuming something disastrous doesn’t come up in the meantime.

However, what I have been suggesting recently is that we are getting very close to what could be the end game for the US dollar, and related currencies. I refer to the massive roll-over of debt that the Fed has to deal with in the autumn. In other words, we are about two months away from a potential disaster.

The USA is not about to collapse. Let’s face facts. It has a 30 trillion dollar economy. It is, if left alone by government, likely to innovate and grow over the coming decades. However, that doesn’t mean it isn’t currently in serious trouble.

The country has a serious debt problem. The dollar is tanking, and likely to collapse in the near future. And one serious problem is that since the rise of the BRICS nations the dollar has lost its standing as the primary currency for world trade, and that decline is set to continue.

That also means that US debt instruments are no longer the safe haven they once were. And that means that in order to carry on in any way at all the dollar either has to fall substantially, or interest rates have to rise significantly.

Here is a chart of the USA’s international investment position. This compares US assets that foreign investors own against foreign assets that investors own in the US. There has been a sharp decline in foreign investment. Obviously, that investment is going into growing countries, not those that are struggling.

Foreign investors have traditionally owned US stocks. But remember the wise person buys low and sells high. The US stock market trades at a P/E ratio of 25 times. Non-US stacks trade at an average P/E ratio of 16. Where’s the potential? Not in the US, which is clearly over valued.

Investors have been dumping U.S. assets in favour of foreign assets ever since January. Why? Trump’s trade wars. Trade wars wreck trade. Other countries simply dont want to play ball.

Today, capital is flying out of America's door.

Investors are moving out of U.S. bonds. And they're moving out of the U.S. dollar.

In a previous blog I showed a chart of the decline of the value of the dollar. That is continuing. And here’s why? US debt!

And we haven’t yet reached the autumn refinancing escapade when about eight trillion dollars worth of debt has to be refinanced. What is that going to do to the bond market and interest rates?

The big problem with all this as far as non-Americans are concerned is that the G7 group of nations, meaning largely Western Europe, are in the same boat. In short, no matter where you look things are not going well.

The latest gimmick to raise money is to issue short term debt. That usually means debt with a maturity of a year or less. However, the latest issue is for bills with a maturity of four weeks. That is unprecedented.

Let’s put together a few basic facts.

1 The US dollar’s use for international trade settlements is dropping rapidly, meaning there is less and less demand for dollars. Short supply usually foretells a price rise. Over supply leads to a price fall. The latter is what is currently happening.

2 Since the value of the dollar is falling and the outlook is unstable, that means the dollar’s role as a reserve currency is seriously at risk. Reserve status is dependent upon full faith in the US government. That faith is evaporating at an increasing rate of knots.

3 The US debt ratio to GDP is somewhere in the region of 130% which is way over the 90% level which is the point at which the debt becomes unsustainable. In other words, current debt cant be managed, yet the US government is taking on more debt.

4 There is an annual budget shortfall of just over a trillion dollars, so the debt is ballooning on an annual basis, with no means of paying for that shortfall, except for taking on more debt, or printing money, both methods which will seriously increase inflation and trash the currency.

5 Under such conditions the USA is progressing two major wars, and threatening a third. All three situations are futile because there is no way the US government can pay for such wars. Just look at one small example. The Fed has just issued a 100 billion dollar loan facility to bail out the government at the same time that the puppet government in Ukraine is asking for 120 billion. In short the US taxpayer is being asked to pay for a debt it cant service in order to pay for a phoney war. Thank god I’m not an American tax payer. Your government should collectively be in padded cells where they cant do any more harm.

No doubt matters will get worse before they get better. I dont see how this can be resolved without a massive collapse. The question is, what will be the collateral damage? Which might be where my suggestions regarding appropriate investments might usefully come in. Let’s see if I can put such an argument together for next week.