US’s Ability To Finance Debt Is Starting To Crack

There are limits as to how much debt a person, a household and even a country can comfortably take on. When the limits are reached, those that purchase the debt with an expectation for repayment of principal and a reasonable rate of return begin to call into question the viability of the enterprise that is issuing the debt. The USA is slowly reaching those limits. Having spent over a trillion dollars to bailout countless banks, automakers and homeowners; the USA finds itself on its hand and knees to the rest of the world. It’s in the unenviable position of having to “grovel” for capital. It’s not a position that it has known well. The US needs capital to finance all of the bailouts.

US citizens are tapped out. Jobs have left the country en masse. Unemployment swells. Where will the money come from? In the past it has been financed mainly by China, Japan and UK. They have been the largest purchasers of US Treasury securities. Data released this week indicates that Foreign purchases of US securities are on the decline. The US Treasury publishes a monthly “TIC” report which highlights changes in the buying habits of Foreigners purchasing Long Term US Securities.

The data released this week highlights the scope of the decline over the prior year. In 2007 there was over $1Trillion of Long Term Securities purchased by Foreigners. In 2008 there was just over $412bn purchased. That’s a rather steep decline.

The decline in purchases is coming at a time when the US is going to need purchases to be stepped up even more, as the issuance of bonds coming to market over the next year will increase dramatically. The rubber has hit the road. USA now has to pay for the bailouts and they are borrowing - or attempting to borrow to pay for everything.

Time will tell whether or not the rest of the world is willing to continue to pay for the US bailout plan or whether they will let them fail. The question is not too different from the questions facing the US about our own financial institutions. Should the government let Bank of America (BAC) and Citigroup (C) fail? Should they let Chrysler and GM (GM) fail? China is probably asking the same questions: Should we let the US fail or should be buy more of their treasuries and bail them out?

See - Foreigners Wary of Long Term US Securities - NYT

While the US is seeing its ability to refinance its deficits diminished, China is also going on a natural resource buying spree. This past week they announced deals with Venezuela and Brazil regarding oil supply and natural resource investments. Instead of investing in US paper assets, they decided that it might be more beneficial to own hard assets, so that if and when the world recovers, they will have control of more important assets.

See - China Starts Investing Globally - NYT

Perhaps the US should have considered embarking on this course of action instead of giving trillions of dollars to failing businesses. That money would have been better spent on securing natural resources for our future. If the US continues on its current course of action, then perhaps we better start learning to speak Chinese. That strategy may pay true dividends, as each day it becomes more obvious that China will become the dominant super power for the next 100 years.

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