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U.S. National Debt: Creditors Getting Worried? Russia Reduces Holdings by Over 90% Lombardi Letter 2018-07-26 13:18:51 The U.S. national debt seems to be getting out of hand. It continues to surge and it could balloon to become much bigger. This could spook the creditors to the U.S. government and cause a lot of problems ahead. Analysis and Predictions,Inflation,U.S. Dollar,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2018/07/iStock-474668024-150x150.jpg

U.S. National Debt: Creditors Getting Worried? Russia Reduces Holdings by Over 90%

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U.S. National Debt: Creditors Worried?

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Soaring U.S. National Debt Could Create a Lot of Problems Ahead

I don’t want to be the bearer of bad news, but the U.S. national debt seems to be getting out of hand. It could create a lot of problems in the coming years.

Surely, you will hear the argument that says “Oh, national debt doesn’t matter.”

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I agree with this argument to some extent. In the short term, governments can borrow a lot of money—be it for specific projects or to spend their way out of a recession.

In the long term, however, continuous borrowing is not sustainable. In times of economic growth, governments have to tighten their belts a little. They need to control spending and reduce debt. The U.S. economy is growing at a healthy pace, but the U.S. government is failing to manage its debt.

The U.S. Is Becoming a Family That Borrows More to Pay Off Loans

Imagine that you are a banker. A family comes to you and says, “We’d like to borrow $100,000.”

Will you give them the loan just like that? If you are a savvy banker, you’d check their credit, job prospects, and determine if they are able to pay the loan back.

If the family says, “We will be borrowing more money to pay off this loan,” will you give them the loan?

You see, as it stands, the U.S. government has become that family.

It has too much debt already. At the time of this writing, the U.S. national debt stood at almost $21.3 trillion. (Source: “The Daily History of the Debt Results,” Treasury Direct, last accessed July 23, 2018.)

The national debt continues to get bigger every second.

In the next 10 years at least, no budget surpluses are projected. So, you can expect the government to amass a much bigger debt.

Mind you, there are currently no plans on how to manage this massive debt load. Also, it looks like the government will be borrowing more money to pay for the debt it has accumulated.

If a Company Did This, Its Shareholders Would Punish It Severely

Dear reader, if a company borrowed like the U.S. government is borrowing, its shareholders would punish it severely.

Remember, with debt comes debt servicing payments. Higher debt means higher debt payments; the more the government borrows, the more interest it has to pay.

So far in fiscal-year 2018 (which began in September 2017), the U.S. government has paid $413.0 billion in interest alone. (Source: “Monthly Treasury Statement,” U.S. Bureau of the Fiscal Service, last accessed July 23, 2018.)

For the entire fiscal-year 2018, the U.S. government has budgeted for interest expenses of over $500.0 billion. This amount is higher than the gross domestic product (GDP) of Belgium!

U.S. Government’s Creditors Getting Worried?

Keeping all this in mind, I ask one question: Will the bankers of the U.S. government, those who lend it money, be nervous about this?

It looks like they are already slightly concerned.

Look at Russia. In 2010, it was one of the top 10 holders of U.S. debt. The country held $176.3 billion worth of U.S. debt. In May 2018, this amount was just $14.9 billion. (Source: “The great dollar dump: Russia liquidates US Treasury holdings,” RT, July 18, 2018.)

That’s a reduction of over 90% in U.S. debt holdings.

One could argue, “Russia is doing this because of U.S.-Russia relations haven’t been that great these days.”

Keep in mind that this reduction in U.S. debt holdings didn’t happen in a day. It took several years, during a time when debt markets were surging. Russia sold U.S. debt in a period of strength.

We have heard warning shots from China as well.

If you recall, a news story surfaced not too long ago that talked about how China could be looking to sell U.S. debt. Later, we learned that it wasn’t a true story. Still, it left investors spooked. What if we actually hear about China dumping U.S. debt like Russia has been doing?

Dear reader, what I am trying to say is that the U.S. national debt is something that shouldn’t be ignored. The creditors to the U.S. government seem concerned. They haven’t said it, but their actions are speaking louder than words.

If the creditors to the U.S government suddenly say that they can’t lend any more, it could have dire consequences. Right off the bat, you could say goodbye to the U.S. dollar—it could come down tumbling.

I reiterate what I said earlier: watch the U.S. national debt. It won’t be a problem for tomorrow, but, over the long run, it could hurt American consumers, companies, and investors immensely.

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