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U.S. Debt Has Finally Become a Major Hazard to the Economy Lombardi Letter 2018-06-20 14:14:06 US economy debt crisis US treasuries Russia China sanctions US-china trade war president trump US debt weapon deripaska President Donald Trump's methods to rebuild America's greatness could backfire. It could produce the very opposite, starting with triggering a major U.S. debt crisis. Analysis and Predictions 2018,News,U.S. Dollar,U.S. Economy,U.S. Politics,World Politics https://www.lombardiletter.com/wp-content/uploads/2018/06/iStock-860183434-150x150.jpg

U.S. Debt Has Finally Become a Major Hazard to the Economy

Debt Has Become a Major Hazard

iStock.com/gustavofrazao

Trump Has Activated Too Many Risks as World Retaliates Through U.S. Debt

President Donald Trump’s “Make America Great” policy certainly makes sense from the electoral point of view. But the way he has gone about “rebuilding” the greatness could backfire. It could produce the very opposite, starting with triggering a major U.S. debt crisis.

Simply, rather than dissipating, the Trump White House has set off a series of domestic and international disputes.

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The rest of the world senses that the United States has started to behave like a wounded animal. It has become unpredictable and dangerous. In other words, it has exposed its vulnerabilities, which other powers could exploit.

While the U.S. government continues to spend ever more money on defense, it’s overlooking a key weakness: U.S. debt.

Rather than retaliating militarily or diplomatically (through sanctions, for example), rival powers can use their holdings of U.S. debt to dump their Treasuries (Treasury Bonds) and launch a major strike against the dollar.

Given that the Trump White House appears convinced it can apply trade tariffs and enforce sanctions against potential “rivals,” the latter can use U.S. debt as a deterrent, especially when it continues to rise.

U.S. debt used to be $20.0 trillion when President Barack Obama left office. It now stands at $21.0 trillion with no hint of slowing, given the generous corporate and high net worth individuals’ tax cuts passed in December 2017.

The result would be nothing short of the over 70-year-long dominance of the U.S. dollar.

Who Could Exploit U.S. Debt?

Unfortunately, it’s too late to discuss retaliation in the future tense. China and Russia have already begun using the U.S. debt weapon.

In April, Russia alone managed to sell half of its U.S. Treasury bonds. It now has a total of about $48.0 billion. That sum was $150.0 billion in 2013.

Russia used to be the world’s 16th top holder of U.S. debt. Now, it has dropped to 22nd.

Yet, as dramatic as the ranking or sheer value, it’s the frequency and determination of the process that betrays just how far Russia intends to go. (Source: “Half of Russia’s US Treasury Bonds Sold in April,” Sputnik International, June 16, 2018.)

After acquiring some $22.0 billion of U.S. debt in 2017, Russia made a swift turnaround selling it off between March and April 2018. It has been replacing the dollar with gold.

It’s no accident. The United States attacked Syria, under the guise of reacting against widely disputed allegations of a Syrian chemical attack in Damascus’ suburb of Ghouta (Syria).

Then there were U.S. Department of State sanctions against Russian business leaders, including Oleg Deripaska, Russia’s aluminum “magnate.”

The U.S. Debt Weapon

President Vladimir Putin, unlike Trump, plays the long game. Rather than risk a counter-productive military move, he’s chosen to use the U.S. debt weapon. That can have a far more harmful impact.

By slapping $50.0 billion in tariffs against China, Trump can expect a similar response from Beijing. And possibly even from Tokyo.

China and Japan are respectively the first- and second-largest holders of U.S. debt. And Trump has left these countries little choice but to hit back against tariffs and duties against their exports.

Russia has set the path, but China and the European Union could follow up on the Treasury dumping spree to retaliate against their increasing grievances against Washington.

The European Union had a significant stake in the Iran Deal.

Many EU companies conducting billions worth of trade with Iran have been forced to withdraw from the Middle Eastern country. These include oil majors like Total SA (NYSE:TOT) and Airbus SE (EPA:AIR).

The EU has endured a longer and deeper recession, in many ways, than the United States after the 2008 financial crisis.

The Iran Deal was seen as a hopeful and lucrative tool to create more wealth. Trump stunned the Europeans, moreover, because they are U.S. allies.

The U.S. Debt Jig Is Up

If that’s the reward for alliance, then what’s the punishment for “enemies?” Russia has revealed the solution to grab Trump’s attention: dump U.S. debt.

Of course, the biggest danger comes from China. Trump has backed his anti-China rhetoric with actions. The president has launched the opening salvos of a full-on U.S-China trade war.

The effect of multiple attacks, exploiting U.S. debt, would be a loss of status for the United States. It would mean that Trump’s economic gamble based on lower taxes and higher infrastructure spending would fall flat.

Moody’s Investors Service warned that the trade wars and the related sovereign U.S. debt risk will face negative forces.

Certainly, whatever gains the steel industry makes from Trump’s aluminum tariffs, they will pale in comparison to the extent they will damage the U.S. economy. (Source: “Steel, aluminum tariffs seen hurting U.S. economy – Moody’s,” Reuters, May 31, 2018.)

As he has proven on too many occasions, President Trump is a gambler.

The president has been treating the United States like one of his casinos. However, rather than risking his own millions, Trump has been putting the reputation of the United States on the line.

Reputation happens to have enormous weight in international affairs.

As isolationist as Trump’s foreign policy intends—or better, pretends to be—the world has become too financially interconnected to allow major economies to pull out without consequences, let alone the United States.

The reality is that Russia has coped with sanctions so well that the policy may have helped revive some of its old industries. Agriculture and food production have improved.

What produce Russia imported from southern Europe, it has found a way to substitute. The country can also count on the availability of key resources from metals to petroleum.

In other words, Russia has learned to live with sanctions.

America’s Reputation Is on the Line

Any more sanctions the U.S. applies could end up hurting U.S. interests more than Russian ones. Moscow’s dumping of U.S. Treasuries is merely one of the ways in which this is happening.

What works for Russia, and for similar—and magnified—reasons, also works for China.

Rather, Trump’s approach—and from the Russia sanctions perspective, Barack Obama deserves equal responsibility—is denting the U.S. economy.

The rising sovereign debt, along with the risks that are accumulating against it, have raised serious questions about some key beliefs that many people around the world associate with America.

Ultimately, what makes the U.S. unique and powerful, economically speaking, is its ability to control the dollar. It can run massive debt and be assured of always being able to dispose of excess “paper.”

This ability allows Washington to pay for the massive military bills that project American power worldwide.

When friends and foes start dumping that debt, therefore, it suggests that U.S. influence has waned. It also means that the U.S. economy won’t be able to function.

The Dollar Could Lose Its “Job”

The dollar’s job in global financial markets, and the related influence and liquidity of U.S. debt instruments, essentially allowed the U.S. economy to take on almost any risk burden.

No matter how extreme, the dollar’s status as “world currency” has until now enabled the United States to absorb shocks and changes in financial conditions.

Moody’s and other rating agencies could start lowering America’s credit rating. The first effect would be to make borrowing more expensive. The U.S. was one of the winning parties in World War 2 (Russia/the USSR was the other major one). It then “won” the Cold War.

But, winner or not, the rich and diverse U.S. economy can’t sustain its current burden of debt for much longer.

It’s also less able to advance its interests. The very sustainability and privileged status of the U.S. dollar have come under threat. It’s as if the world has identified the kryptonite that can bring down America’s (once) super-economy.

Without the power of U.S. Treasuries, the U.S. government will have to address the U.S. debt and the budget deficit. Failure and inability to do so cannot but result in the U.S. economy blowing up.

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