Mar 16, 2010

Social Security Goes The Way of China and Japan

At present the Social Security Administration holds 20% or $2.4 trillion of the $12 trillion that the U.S. now owes. That means that the government will soon lose its single biggest customer of U.S. debt. No one is saying exactly when this will occur but I’ll guess that the party is winding down and will end in the next two years. At the same time the next two largest purchasers of U.S. debt, China and Japan, are trimming their purchases of U.S. debt by 15% a year.

As I wrote last May in, The Honeymoon Is Over And I Want A Divorce - Obama’s Interest Rate Quagmire, there are pressures coming from all directions that will push interest rates up. The dollar has been losing value against all currencies except the Euro and the Pound, which are having their own fiscal problems. As soon as the problems in the EU start to subside the demand for the safe-haven dollar will also decrease.

When the above circumstances are combined with the need to fund an extra trillion a year in spending, interest rates have to move and move big. The first casualty will be a housing market that, because of government intervention, has not been able to work through its current downturn. Higher mortgage rates mean less affordability putting pressure on both home sales and home values that have little room for bad news.

The major money center banks like Goldman and Chase-Morgan have been thriving because the fed has kept the money flow to these guys at full blast and at little or no cost. They have been using that flood of short term money for everything but small business lending. For them it has been the perfect storm. When their interest rates raise the major money center banks will be in the exact place that stated this mess; an immediate cash squeeze.

As the government issues massive amounts of debt, corporate debt will also be entering the peak of their debt cycle. As stated in the Times article below, corporations will be bringing $700 billion of debt to the market. Competition for money is another factor for an increase in rates.

Currently the only positives for the future of interest rates would be if a if the U.S. has a phenomenal economic turnaround or if a war breaks out somewhere leading to another flight-to-safety.
 Posted on HOT AIR by ED MORRISSEY: Social Security starts cashing in US debt

An AP article by STEPHEN OHLEMACHER: Social Security to start cashing Uncle Sam's IOUs

An AP article by MARTIN CRUTSINGER: China trims holdings of Treasury securities

A New York Times article by NELSON D. SCHWARTZ: Corporate Debt Coming Due May Squeeze Credit