The Investment Scientist

Is The Ever Increasing Debt Ceiling The Impending Doom of America?

Posted on: October 10, 2013

ImageWhen I was in California, I had a very intelligent debate with a doctor. He mentioned that in 2012, the US took in $2.5T in revenue and spent $3.6T in government expenditures.

He accurately pointed out, “If I spent like that, I would be bankrupt in a few years.” He believes so strongly that the US is going the way of national bankruptcy that he has moved substantial amounts of his money overseas and has invested a great deal in gold.

I happen to believe that gold is the most unproductive of assets, since it does not generate dividends or interest and it actually costs money for upkeep in a safe in a Singapore bank.

On top of that, by throwing so much money into gold, one could over prepare for a disaster that is very unlikely to happen and thereby miss out on all the opportunities to grow wealth in this country.

But I still need to explain why the US won’t go bankrupt anytime soon. Here are two explanations:

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1. The US is not like a household, it can raise taxes on its residents. When Clinton did that, he managed to close the budgetary gap within a few years. At the end of his tenure, we were seeing a budget surplus.

2. The US can print money and engineer controlled depreciation of the dollar, with a target inflation of 2%.

We owe China $1.3T this year, next year we will owe them 2% less due to dollar depreciation. It’s like we can borrow $100 today and pay back only $98 tomorrow. So the more money we borrow, the more we as a nation will benefit.

In effect, China, the biggest foreign lender, is subsidizing us by earning a negative interest. But why they are so stupid?

They have no choice because the US dollar is THE reserve currency. All their trade surplus has nowhere else to park but in US treasuries.

As long as the US dollar maintains the status of sole world reserve currency, we can extract substantial rents from lender countries like China, Japan and Taiwan.

No other world currencies even come close to the US dollar, so it is safe for the country to raise its debt ceiling now.

But you can bet your money that China is working diligently to chip away at dollar hegemony, so all the warnings about ever increasing debts are unfortunately warranted.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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