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The Slide Has Begun
Headline says: "Dollar Falls" — It Means: Interest Rises
February, 2005

I've been saying for years that we face an impending financial crisis when the escalating national debt triggers escalating interest rates.

A February 22nd Washington Post story reports,

"South Korea's central bank said on Monday it planned to diversify its reserves, which are the world's fourth largest, into a greater variety of currencies...South Korean public and private investors hold $69 billion of U.S. Treasury debt, according to Treasury data."

The article goes on to discuss the impact on world curriencies, principally on the dollar. This isn't really news, and it certainly isn't a surprise.

The article only hints, though, at what may concern us most in the next few years. That is what will happen to interest rates in the major financial markets. I'm not talking about your home mortgage rate here; I'm talking about interest rates whose impact you cannot avoid.

South Korea's $69 billion holdings of our national debt are relatively tiny, less than 1% of the total debt. But as the Washington Post article points out, South Korea isn't alone in re-evaluating how much it wants to invest in the United States; most other governments and foreign private investors are also rethinking their U. S. debt holdings.

How will this affect you and me? Let's suppose that over the next year, South Korea cashes in ten percent of its U. S. debt instruments, about $7 billion worth, and that a half dozen other major governments do the same, including China and Japan. They can do that, of course, and we have to pay them when they do.

But we don't have the money. So we have to borrow it elsewhere. Only there will now be fewer people waiting in line to buy our securities (loan us the money). So we have to attact some new lenders. The only way to do that is to pay higher interest on our bonds and notes.

Higher interest means greater cost to our government. But we don't have the money to pay that higher cost because we aren't collecting enough in taxes. And we refuse to pay higher taxes. So we have to borrow the money to pay the higher interest. And we have to borrow it in a shrinking market, because fewer people are willing to lend to the U. S. So we have to attact more new lenders by paying still higher interest.

You get the picture:

  • Fewer borrowers leads to:
  • Higher interest rates, which leads to:
  • Bigger debt, which leads to:
  • More borrowing, which leads to:
  • Higher interest rates, which leads to...

If you're an average working person in America, you are already paying, directly out of your pocket, well over $200 per month in interest on the debt. (Click here for recent numbers.) That will be going up now; it has to. How much it rises will depend on how willing we are to tackle this huge debt problem.

Do I have your attention yet?

If not, keep checkin' back.

   

copyright © 2010, J. C. Adamson