It is no big secret that the United States federal debt is at an all-time high. It has been going up exponentially for years and years. The US paid off all of its debt once, in 1835. When the Civil War happened, the government debt skyrocketed and since then has never looked back. Financing 2 World Wars, a number of recessions, and a pandemic created a very large and growing debt.
The biggest problem though, is that the US government has taken in less revenue than it spends, year after year. The largest single contributor to revenue is taxes. Federal income taxes and corporate taxes have not kept up. Spending with no limits has occurred on a frequent basis, regardless of which party controlled Congress or the Presidency. Some did better than others, but the situation continues on with no real end in sight.
Nothing being proposed today will change this either. The ideas being brought forth fail to recognize the negative impact that they will have on the debt. They think by cutting federal spending and raising tariffs, they will somehow reduce the federal debt.
They fail to realize the world has changed and we now live in a very global and intertwined economy. The US debt is financed by the very countries that finance our debt. Tariff wars will not significantly reduce the debt. Tax breaks for the wealthy and corporations will not impact the debt, they will cause it to increase as those breaks only create lost revenue.
The US finances its debt by issuing Treasury Bonds.
Treasury Bonds are sold and promise to pay a higher amount than was paid for them. The interest paid has never failed to be met, making this investment a super stable one. The amount paid varies with a number of factors, but generally it is tied to the value of the US dollar and the strength of the US economy.
Treasury Bonds are bought by a wide variety of purchasers. Twenty percent is currently held by Intragovernmental buyers, while 80% are sold to the public.
About 40% of the public purchasers of US Treasury Bonds is foreign countries. Foreign counties enjoy the stability of a guaranteed return, even if it is lower than riskier investments.
Some countries use the purchase of Treasury Bonds to manipulate the value of their own currency. If the value of the US dollar increases, it has an opposite impact on their own currency. A higher US dollar reduces their currency, thus making the goods that they make less expensive to buyers of those goods. The lower valuation of their currency also allows their economy to thrive as their manufacturing improves and the employment of their people increases, and their economy improves. So, it makes sense to them to invest in buying US Treasury Bonds and finance our increasing debt.
Of the 80% public owned Treasury Bonds
Japan holds 12.75%
China holds 9%
United Kingdom holds 9%
Luxembourg holds 5%
Cayman Islands holds 4.5%
Switzerland holds 4%
Ireland holds 4%
Canada holds 3.8%
Brazil holds 3%
By some estimates, the US dollar has been “overvalued” for quite a long time. It has been blamed for a lack of US manufacturing growth in certain areas.
The balance between financing US debt and controlling the strength of the US currency is not a simple one. We need to continue to find buyers of Treasury Bonds, while keeping the value of our currency from rising higher versus other countries’ currency.
In fact, if the currency of countries that compete with our manufacturing continue to be far lower than the value of the dollar, it would make no economic sense for an company to bring manufacturing back to the United States, unless the cost of labor is substantially reduced from todays cost, and the cost of materials (including transportation and logistics) is reduced also.
The current administration has decided to attack the currency imbalance concern by issuing tariffs against countries on certain material and products. For tariffs to work the US has to hold the US dollar stable against the foreign currency that they are imposing the tariffs on.
A major problem related to this approach is the retribution of tariffs on the goods and material we export to them. That often mitigates the impact of tariffs on their exports to the US.
The impact of a tariff war on the US is that the consumers in the country will end up paying of the tariffs in the form of higher prices. Higher prices drives inflation up, making everything cost more and more.
Meanwhile, companies will avoid increasing manufacturing in the US, as they wait out the fallout from the rising inflation by laying off the workforce in the US. Jobs will be lost rather than increased. That revenue in the form of income taxes and corporate taxes will be lost too. The administration will continue to lower tax rates for the corporations and the wealthy, while increasing the tax rates on what is left of a quickly disappearing middle class.
The US debt will increase even more, and the US currency will eventually begin to fall as a recession (if not a depression) envelopes the global economy. The idea that isolationism will somehow save the US from financial ruin, will prove wrong once again.
Tariffs wars are only going to make things worse for everyone. Unless countries want to eliminate currency manipulation and really move to a global free trade economy, where everyone wins and loses together, instead of the current necessity to control currency in order for one country to succeed while others don’t.
The bottom line is that trying to reduce the value of US currency, in order to entice companies to invest in additional manufacturing domestically, is short sighted. The currency valuation is minor in the larger economic picture. The US losing the ability to compete in manufacturing is far more related to the cost of increasing labor. Corporations have for decades sought out the lowest labor costs, shutting down manufacturing in spite of higher logistics and transportation costs. Tariffs are not a deterrent to them, as the cost is simply passed on to the consumer.
What might be a bigger concern is what happens if China simply decides to double down and buys even more US debt (US Treasury Bonds). The Chinese yaun will continue to be deflated in value, and the US dollar will increase in its own valuation.
The United States dollar is the currency that all other countries are valued against. A strong US economy keeps the dollar value high. It puts the US at a disadvantage for competing against other countries while importing their items, and exporting our items.
When the US dollar too strong, we can buy more – but sell less. If the amount we bought and sold were equal, there would be no difference. But, we currently import more than we export.
Rather than trying to level the playing field using tariffs (that don’t work and only hurt the consumer), why don’t they try creating incentives to corporations that increase exports, and decrease importing goods and material.
Decreasing corporate income taxes should be coupled with the incentives needed to create jobs here, while increasing exports and reducing imports. Invest here, purchase items made from here, increase capacity and jobs here. Then, enjoy a substantial corporate tax advantage here.
Beware that the mighty US dollar could be replaced by a different monetary standard. Once enough countries have enough of the bullying tactics being used to try and strongarm them into ending the currency manipulation in their favor, they might just walk away or convince others to us their currency as the monetary standard.
China, for instance could find it advantageous to become the new “gold” standard for currency. If that occurs, the US economy would be on very unstable ground.
The US economy is strong when the US dollar is strong. Unfortunately, when the US dollar is strong it doesn’t make sense for companies to invest in work here and employ more Americans in great paying jobs.
More Americans in great paying jobs helps the incoming revenue needed to offset the spending and keep the debt somewhat under control.
Keep going down the road they are on, and the result might just be – fewer jobs, more inflation, less revenue, and more federal debt – even if they are able to reduce the federal spending by what ends up being just a little bit.
Ruminati 