There Is No US Debt Problem: Yet

There are a lot of people who discuss the United States debt and see it as a problem. This is looking at things through the wrong lens.

We see the memes and graphics online of what the total US debt is. People break it down based upon each individual. These make for great clickbait but really do not capture what is taking place.

Like most things in economics, finance, and money, we cannot look at the issue in a vacuum. People mostly simply things to the point where they miss most of what transpires. It is great to try to bore down but these systems are interconnected networks that rarely operate in isolation.

So let us bore down into the debt situation and see how it looks.

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Who Wants It?

When looking at the United States debt situation, we obviously are referring to the amount of Treasuries issued. Congress, like most countries, runs a deficit each year, meaning the tax revenue does not cover the expense. For this reason, to make up for the shortfall, the U.S. Treasury, through the Federal Reserve, will sell bonds (notes and Tbills).

This is the extent most people go to when looking at the situation. They see the United States indebted and watch the total grow. To them, it is the end of story.

Actually, this is only looking at one piece of the equation. The flipside of debt is an asset. While it is a liability to the issuer, the one who purchases the debt has an asset on the balance sheet. This is because it have value on the market along with providing a stream of payments.

Which brings up the first question with debt? Does anyone want it?

This is crucial. As long as people are willing to buy the debt, there is no problem. The reason is that new bonds can be issued, whether it is to cover new spending by Congress or to roll over previous debt.

Whatever the purpose, if there are buyers, no problem.

This situation flips if the buyers go away. Here we see how not only meeting present obligations becomes impossible, serving all the old debt goes out the window.

Eurodollar System

We mentioned this on a number of occasions. This is the heart of the US debt situation. It is also the reason why the stopping of buying US Treasuries is not going to happen.

The Eurodollar System, like most today, has little currency involved. In other words, there are no eurodollars at the heart of this. Instead, we have ledgers that are filled with assets that are used as collateral. This is a system that is based upon secured lending.

It is an enormous market. It funds 90% of global trade so this is a vital component to the economic output around the world.

Here we see US Treasuries as the main game in town. When talking about the highest of quality collateral, it is the one everyone defaults to. This is because it will garner the best interest rate on payment and have the lowest over collateralization.

That makes it highly desired.

This was not the case exiting the Great Financial Crisis (GFC). At that time, while mortgage backed securities (MBS) were blown up, sovereign debt was still stable. Unfortunately, many central banks went negative with their interest rates, something that blew up their bond markets.

It resulted in the US Treasuries as the only one standing.

When Will This End?

That is hard to say.

Right now we are in a collateral crisis. We often hear the term "balance sheet constraint". What they are referring to is the lack of ability for international banks to make the loans required due to a lack of capacity (read assets). The entire system is starving for assets. It is leading to a shortage in dollar denominated assets.

Therefore, everything the US puts up for sale in terms of bonds will be bought. The situation gets insane when talking about T-Bills that are going for a price above Repo. It shows that return is secondary; the collateral is what is needed.

Can the increasing of debt go on forever? Of course not. The problem is we have a liquidity crisis in terms of quality collateral and there appears to be none on the horizon (my view is the solution will come with digital assets but that is another story).

Until this is resolved, US Treasuries are the only game in town. Hence, the debt will be bought and the rolling of it is not a problem. An issue could arise with the cost of serving, which, like a credit card, increases the bigger the balance gets. With this, more of the economy has to go for servicing, meaning growth slows.

Of course, the US might be in the position of what Irving Fisher basically summarized as Ponzi debt.

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