Fundametal Numbers

Fundamental Numbers

A recent Reuters Business News headline advised readers that, “Foreign buyers find U.S. Treasuries less appealing.”

This may be news to their readers, but not to ours. We have talked and written about this many times. In many ways the US is shooting itself in the foot, driving the rest of the world away from reliance on the greenback, by imposing sanctions, embargoes, restrictions, and even asset freezes on foreigners conducting business in the dollar.

All that is true enough.  Yet even if dollar commerce and trading were entirely free of political oversight and bureaucratic meddling, the world would continue move away from dollars (and US debt instruments) at some rate.

That is because of the economic fundamentals.  Since the dollar is not real wealth in itself like gold or silver, it is only valuable as an IOU (although some wags have called it “an IOU nothing!).  Dollar holders assume that their dollars are valid notes, ones that people will accept in exchange for goods today, tomorrow, and for many tomorrows thereafter.

But if the rate of that exchange for real goods and services is not reliable, other units of exchange, time-tested currencies like gold, become more desirable.  

When we are at the point that the US government can only pay its bill by creating more dollars, existing dollars become worth less.  The dollar’s exchange rate for real goods and services declines.

This is what happened when President Nixon repudiated America’s promise to always exchange gold for its dollars.  The US was clearly printing more dollars to fund its welfare/warfare state than there was gold to exchange.  

The US was like someone writing checks for more money than in his account.  Individuals who write bad checks can end up in prison.

With that in mind, here’s a quick review of some of the US government’s accounts.

The visible US national debt today is $21.85 trillion.  That’s roughly $67,000 per person in America.  Or $268,000 for a family of four.  

That’s big money for most Americans.  

Over the last 12 months, since this time last December, the federal debt has grown by $1.363 trillion dollars.

That is so alarming that Washington politician’s hair should all be on fire!  Instead it is quiet as a mouse.  There is little or no coalition in congress to control the raging debt growth.

Meanwhile, the invisible debt of the US, the unfunded liabilities of the government, promises it has made to pay for things like Social Security, Medicare, and veterans’ benefits, runs somewhere between five and ten times the visible debt.

Those are some of the numbers that explain fundamental reasons why foreigners’ faith in the dollar is in decline.

For those fundamental reasons, as well as the political reasons mentioned earlier, there is a global movement away from the dollar.

Today’s movement out of the dollar is just a trickle.  It will eventually be a flood.  No one can say when that will be, only that it is drawing nearer.

That is why foreign central banks and governments, and individuals around the world buy gold.