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A country with a large amount of debt owed to foreigners might be subject to bubble tendencies, followed by a crash – especially if that debt is currently rising at a fast clip. Today I’ll look at the position of the United States.
There are three big debtor groups, (1) Government, (2) Households, (3) Corporations. First let’s look at government debt.
The overall government (federal) debt, 1965-2017
This was merely $6,000bn in 2000. It rose to $9,000bn on the eve of the 2008 crisis, but the rate of obligations accumulated rapidly in the Great Recession to $20,000bn.
As a percentage of GDP, federal debt has leapt to around 100%, from around 50% – 60% in the 1990s and 2000s, and under 40% in the 1970s.
Gross Federal Debt as a Percent of Gross Domestic Product
Financial Times article 1.6.17 by: Jamie Chisholm
Shyam S. Rajan, rates strategist at Bank of America Merrill Lynch,…reckons that whether or not US tax cuts occur, the supply of US government bonds is likely to rise substantially. “In essence, the US Treasury is underfinanced by anywhere between $2-$4.5tn over the next five years.
Of this, even conservatively speaking, there is likely to be a $1tn shortfall in demand using current trends. ”The burden of absorbing this extra supply will fall on three price-sensitive channels, says Mr Rajan.
Foreign investors may be put off by rising yields elsewhere as the ECB and BoJ look to taper their QE.
US pension funds? “Our analysis suggests that rates need to be nearly 120bps higher for this community to account for the entire $1tn”.
Finally, fixed income mutual funds. “In our estimate, equities need to be 30 per cent lower for mutual funds to see sufficient inflows into bonds to bridge the gap,” he concludes.
What proportion is held by foreigners?
Foreigners can be the first to go on a buyer’s strike and sell down debt at any sign of trouble. So we need to know if the US is vulnerable.
Federal Debt Held by Foreign and International Investors, billions of dollars…………………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
