Rollover Risk and American Hegemony
Michael S. Rozeff
by Michael S. Rozeff: The
Free Market Currency Manifesto
The debt limit
will be raised. Neither side will get its way.
The U.S. government
always raises the debt limit. How else would the debt and the government
have gotten so large?
the debt limit means that the government takes the road to financial
suicide. That step would shock its creditors. The government would
increase its own debt costs dramatically. Washington is not that
episode, budget-cutters will seek other remedies to narrow the gap
between government spending and government revenues. They should
have done that last December. They should have started cutting at
that time, but they were naive and afraid of losing votes.
The debt limit
threat is not a viable threat for either side. Obama has to sign
whatever comes to his desk. The Republicans cannot make draconian
cuts without some sort of American consensus. They wonít do it.
Obama wants his way in forging such a consensus. He canít get it.
Heís harping on a non-solution, which is tax increases on higher
simply showed stalemate and lack of consensus for anything but moderate
change. The debt limit will be raised. The budget problem will not
problem is very big and getting bigger. For the nine months of fiscal
year 2011 to date (October 2010 to June 2011), the U.S. has paid
out $386 billion in interest on the national debt. The government
has had revenues of $1,733 billions. Its spending has been $2,705
billions. It borrowed $972 billion. Thatís $2,705-$1,733.
I define a
financial or bond default as an interruption in paying
the stipulated terms on the governmentís borrowings. Most of its
borrowings are in dollar terms, so that if it pays them off in depreciated
dollars, that is not a default.
on the national debt is running about 22.3 percent of the revenues.
The government is in no immediate danger of a financial default
from not paying its interest. If the debt limit is supposed to get
us excited about financial default due to non-payment of interest,
it shouldnít. The government above all is going to pay its bond
obligations. That has priority one.
factor that looms large. In order to avoid default, the government
has to pay off the principal amount of the debt, which is the face
value of any debt that is maturing. I estimate that roughly 29 percent
of the debt matures in a year, and the debt is about $14,300 billion.
Therefore, each year the government has to pay off about $4,150
billion on principal in order to avoid default. It accomplishes
this by rolling the debt over. That is, it issues new debt and uses
the proceeds to pay off the maturing debt.
has a rollover risk. It might fail to get enough new funds to pay
off the maturing bonds.
revenues are now $1,733 billion a year, so it cannot refund the
$4,150 billion of maturing debt from current revenues. It has no
choice but to roll the debt over. If it fails to roll the debt over,
then its back is really against the wall. If such a failure occurred,
we can mention such hypotheticals as cutting spending or selling
assets, but there is no way that realistic cuts could ever add up
to enough to pay off bondholders if they refused to fund the U.S.
government. The entire amount of government spending, including
the borrowing is $2,705 billions. If every bit of it were eliminated,
the government still wouldnít be able to avoid bankruptcy if bond
buyers went on a massive strike.
If the rollover
risk ever came to pass, the government would have to seize assets,
such as assets in pension funds. Any such scenario is a nightmare.
It is government failure on clear display. It is blood on the streets.
Consensus breaks down. Large battles occur for which the current
debate is a mere warmup exercise.
has borrowed "short", that is, its debt maturity is rather
short, and yet it has many expenditures that are long-term in nature.
Many persons are relying on a continuing stream of government checks,
and if they do not appear, they will be hurting very badly.
Ė inability to roll over a massive amount of debt Ė is not imminent,
but itís a possibility because the absolute amount of the debt has
gotten so large. Even a partial realization of rollover risk via
a withdrawal of some bond buyers from the market means that interest
costs will rise steeply. That will place enormous pressure on the
of scenarios, based on a realization of rollover risk or even a
strong anticipation of it, mean that U.S. debt is nowhere near as
secure as itís cracked up to be.
U.S. is having something of a free ride in the bond markets. Any
shock to the confidence in U.S. credit will be very serious. If
there is one shock, people will realize that there can be more such
shocks. Any failure to pay interest or principal on a timely basis
is a negative shock. This can only make the financial problem more
salient, lead to greater reluctance to roll over debt, and make
more likely the scenario of governmentís inability to pay its financial
obligations. A bond default makes further bond defaults more likely
and more serious.
A bond default
is extremely unlikely because it means the unwinding of big government
and the Empire. Presumably legislators and Obama know this, although
we cannot be sure. They do not want to commit suicide, but they
might do so inadvertently if they are stupid enough.
Any kind of
default sends a signal that bond default becomes more likely. That
can start a run on the government in which its creditors stop funding
it. Poof! Thatís the end of the U.S. government. Thatís the end
of the checks. Game over. A new game begins.
A run is not
imminent. Thereís plenty of inertia in human affairs. The largest
creditors (China, Japan, the United Kingdom) are not pulling out
the rug suddenly. However, China is slowly abandoning U.S. Treasury
securities. In a variety of countries, there is an unmistakable
move away from the dollar toward hard assets. The rollover risk
looks to be slowly coming to pass. The creditors are slowly withdrawing
funding of the U.S. deficits and debt. A gradual withdrawal can
still lead to sudden problems and sudden withdrawals in discrete
jumps. These processes are not necessarily linear.
If the government
has trouble rolling over its debt, it may cram it down into pension
funds. Or the FED may again come to its rescue. Or it may make the
FED come to its rescue. Does any of this matter? All such desperation
measures spell doom for the American economy.
If our creditors
say "No more", weíve had it. At that point, itís best
to wipe the slate clean and start over fresh. Itís best to cut spending.
Better late than never.
state is finished right now. Itís only a matter of time. It cannot
be funded indefinitely by such huge borrowing. The borrowers wonít
roll it over forever. They have too many other better alternatives.
severe cutbacks occur, we will struggle along with rising interest
costs, new and higher taxes, forced financing, asset seizures, and
some retrenchments. Political economic life is coming into a rough
and messy spell that will go on for years. It will seem like forever.
It will be depressing. The arguments will get louder. Inane proposals
will fill the air.
that a large war will be engineered by the U.S. government in order
to justify cutbacks.
air will not be suddenly cleaned. There will be no fresh start.
There will be no reset. Instead, the powers that be will continue
to improvise and administer messy arrangements that add to our problems
and create an atmosphere of oppression and hopelessness, a dreary
political economic world. They didnít reset the bad debts of the
banks. They donít want to reset money to gold. They canít reset
mention a new world currency ("bancor") backed by other
currencies and commodities (a basket). This is an attempt to stop
funding America. The U.S. wonít support it unless it can neuter
the whole arrangement behind the scenes. The bancor wonít solve
the political economic problems of the BRIC countries or those of
the Middle East or Africa.
will be realized. Itís the financial side of a larger struggle of
the major powers in the rest of the world seeking their independence
from American domination. Dollar hegemony is an aspect of American
hegemony. Both are being resisted.
In this worldwide
battle to divorce from the American dollar and stop funding the
U.S. deficits, the BRIC countries and others will continue to increase
their armaments and enlarge their domestic economies. They will
not rely so heavily on the American market. These trends will take
under American control is being resisted. It wonít come to pass.
Itís too costly to achieve. Encirclement of Russia and China wonít
succeed. Russia can ally itself with Germany and France. China can
reach out to Africa and South America and Asia. Europe will prove
a weak link. Conquest of central Asia and the Middle East will prove
world of America-Great Britain-Japan will not come to pass. America
will not rule the world.
have a choice: cut back the welfare-warfare state or continue the
quest for world domination. If they do nothing or continue the quest,
the rest of the world will stop funding America and will build itself
up militarily and economically. America wonít succeed, and the process
of failing will be painful. America will go backwards. Itís more
rational to cut back the welfare-warfare state. That too is painful.
That too cannot be done easily and without many Americans re-orienting
their thinking, plans, and lives. But in that choice, America will
party offers the option of ending the welfare-warfare state. Americans
donít want that option, not yet. A lot stands in the way of rationally
deconstructing the state and empire: a dysfunctional political system,
political divisions, ignorance, miseducation, and entrenched interests.
Will Americans have to learn the hard way?
S. Rozeff [send him mail]
is a retired Professor of Finance living in East Amherst, New York.
He is the author of the free e-book Essays
on American Empire: Liberty vs. Domination and the free e-book
The U.S. Constitution
and Money: Corruption and Decline.
© 2011 by LewRockwell.com. Permission to reprint in whole or in
part is gladly granted, provided full credit is given.
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