Posting again here since deleted
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Why the US Debt, Federal Reserve, and Trump Will End the Dollar and US Supremacy
I’m making this post because I see people everywhere hearing that too much public debt is bad, but also hear experts being split on whether it’s really an issue. I’m not an economist, so I can only express my understanding of the situation.
My position is that the dollar’s position as the reserve currency will end and the process cannot be stopped unless some major events happen. I will explain why by using the 3 graphs I posted and relating them to each other.
1. Interest Rates
People have seen Trump blasting away at Jerome Powell to force the Fed to decrease interest rates to stimulate the economy.
We all know what interest rates are, but few understand the implications of artificial interest rates. Typically, when you lend to someone, you would like to understand their reason for borrowing and you would set an interest rate based on many factors such as risk and expectations of returns. This is obviously to minimize losses to the lender, but also forces borrowers to take on higher quality investments.
However, in comes fiat currency and central banks. Central banks are allowed to “set” Fed Funds rates and lend money out of thin air to banks directly. The US economy works in debt cycles. Whenever the government sees a need for stimulus in the economy due to things such as a recession, war or weakening global economy, the Fed can decrease the interest rate and drive the overall interest rates down through market forces. This is shown by graph 2 which demonstrates that when the Fed decreases interest rates, the mortgage rates for buying a house also tend to come down. When interest rates drop, economic activities expand. This is how you supposedly “fix” an economic downturn.
2. Government/Public Debt
The downside of artificially low interest rates is inflation. Low interest rates cause massive expansion of credit and higher consumption, but also low quality investments. As a certain point, money supply outpaces productivity and causes inflation.
To fix this, the Fed has to increase interest rates again to make borrowing more expensive. However, this kills off the low-quality investments as demonstrated in 07-08. The subprime mortgages failed, banks failed, auto failed, … all because of easy money. So once again Fed rates were decreased and the government itself had to take out loans to “bail out” these companies and banks to save people’s retirement accounts and pensions and jobs. Obama added nearly an additional
$4.5 trillion to the national debt bailing out everyone. The US is now at nearly
$21 trillion in national debt due to all the wars and unscrupulous government spending.
We first have to ask, how has the US been able to control inflation relatively well all these years despite putting over $10 trillion debt money into the economy in the last decade?
A big factor is the dollar as the reserve currency. All the extra money is sent out of the United States via
trade deficits in order to circulate in the global economy in forms such as the petrodollar. The US has to buy more than it sells and also make sure that money outside doesn’t come back into the US in droves.
Thus, Trump wanting to decrease the trade deficit will likely cause more inflation at home if he success in making people send more money back into the US. This is a
Mistake.
3. How Government Funds Debt and Why It Can’t Continue Forever
To fund the US government’s massive spending which exceeds its income, the government issues Treasury bills, notes, and bonds. Each with an increasing duration till maturity. These loans to the government are bought by individuals, domestic and foreign investors, the Fed itself, and domestic and foreign governments such as China.
Looking at all the graphs, you can see a pattern, after every debt cycle, the interest rates can no longer be increased to previous heights. Government debt has also increased non-stop. So why can’t interest rates “normalize?”
Well, most of the US debt matures in the short term. Treasury interest rates are also affected by the Fed Funds Rate. That means that every few years, the government has to take on new debt at a new interest rate to fund its previous debt. Since the US government now consistently has a deficit, the debt perpetually increases. It is more affordable for the government to borrow at the lower rate. Thus when Obama borrowed his bailout money, the interest rates were low.
For example, just a meager 5% average interest rate on $20 trillion of debt is $1 trillion in interest payments annually. Yea, not very affordable.
Trump has cut taxes, increased spending, leading to >$1 trillion annual deficits.
During the imminent next recession, the government has to bailout everyone again. How much money would that take? $10 trillion? What about social security and Medicare payments to Baby Boomers?
By 2030, or the end of the next cycle, the US national debt could be easily greater than $40 trillion since the trend is doubling every 10 years. What’s 5% of that? $2 trillion in interest payments alone up from today’s $377 billion.
How much does the US economy/tax revenue grow per year? 2-3% on $20.5 trillion compared to nearly 7% on the growth of debt?
The End of the Dollar as a Reserve Currency
So here we see that the US Fed Funds rate will likely stay low as determined by the trend as to not increase the deficit even further and also make it impossible to bailout banks and other companies. Borrowing will be cheap, forever. Inflation will increase way beyond 2% no matter how much money they send overseas. Eventually, people will no longer buy US debt because it does not give good returns and it inflates. Less demand means dollar becomes less valuable. All the dollar outside of America will quickly be dumped back into the US leading to even greater inflation. A vicious cycle appears. A dollar that is both inflationary and depreciating cannot serve as a reserve currency. The US will lose control over the world and will not be able to sanction anyone. It will not be able to fund its military. Its people will live at lower standards of living.
Technically speaking, this can be fixed. However, interest rates need to be increased, taxes will have to be massively increased, and government spending would have to go down. The surplus would need to be much greater than $1 trillion per year, which we know will never happen when interest rates are high and government debt has to be funded at a higher rate.
No sitting president would want to tackle this. The rate at which Trump is decreasing the Fed Rate even before an actual recession just shows the desperation of the US.
When Lee Kuan Yew said in order to control the Pacific, the US must keep its national debt in check, he wasn’t bullshitting. Now I believe I understand why.