Mar-a-Lago Accord: Is Trump Coming For Your Treasuries? What’s Next After Tariffs?
Full faith and credit of the US government?
Yes,
a government that is 36T in debt guarantees your 250K
A camera and an internet connection… you too can be an internet star.
The RUMOR is that the idea being floated is that foreign central banks holding Treasuries could be swapped out (voluntarily? involuntarily?) for the 100 year non-interest bearing, non-tradeable Century bonds… not US individuals… purely rumor, as facts are very hard to find.
Depending on the terms of the swap, and how voluntary is, the effect on the world financial markets could range between nothing to extreme. In the extreme, and think of this as an individual, if a tenant owed you rent money, let’s say $2000, and they owe it to you at the end of the month, if they come back to you and say, “Well, I will pay you my rent in 15 years, and no interest, because I believe I’m providing some other “important services” to you by living in your house… I’m providing security services and that’s make it worth not paying you interest.”
Well… that renter would be in breach of contract right?
I think the argument of the US Administration is that we provide important security services to various countries, and we should not pay bond interest, since those services are spendy to provide.
My worry is that it could feel like a “shakedown” or mercenary army arrangement.
THE WORST CASE:
US - Hey European Nation, here are your non-tradeable, non-interest bearing 100 year bonds. Enjoy them
European Nation - You are a deadbeat debtor. Pay us. Your troops are not welcome in our country any longer (and this European government then starts having problems because it has less liquidity… it can’t pay pensioners, pay for health care, pay for defence in Europe it’s spelled with a c), etc)
Any nation hostile to the US and the West - ((Applause))
ANY OTHER COUNTRY WATCHING THIS SHOW - ah… are we next? Do we want to buy any MORE US Treasuries?
The next US Treasury auction held to reliquefy the US Treasury and pay for all of OUR obligations… crickets… but finally they get a bid at the 1980 30-year T-Bond rate of… 15%
US Mortgages go to 18%, like they did in 1980.
none of this is really nice.
What it all comes down to is this. If you borrow money, you stick to the terms of the loan, as a matter of principle and honor. The debtor doesn’t get to renegotiate, not unless they want to be considered a sub-prime borrower.
I’m sure the current administration wants to play off the “If I owe the bank $100,000 I have a problem, but if I owe the bank $1,000,000,000 the bank has a problem” principle…
But I guarantee it is a bad idea; it will cause future costs and unintended consequences that will be worse than just honoring the existing terms.
This will hasten the loss of world reserve currency status for the US. You want to see another country that USED to be the supplier of the world reserve currency? The United Kingdom’s Pound Sterling was replaced by the US Dollar after WW2. Being the world reserve currency gives US consumers a lot of advantages which we aren’t aware of consciously, but we’d notice if we lost this status.
"What are the benefits for the United States?
The dollar’s status as the leading reserve currency has been called the “exorbitant privilege” of the United States, a phrase coined by former French Finance Minister Valery Giscard d’Estaing in the 1960s. At the time, French officials believed that the world’s appetite for dollars provided cheap financing for U.S. investment abroad. Over time, U.S. trade swung into a sustained deficit, supported in part by global demand for dollar reserves. Such demand helps the United States to issue bonds at a lower cost, since higher demand for a government’s bonds means it doesn’t have to pay as much interest to entice buyers, and helps to keep the cost of the United States’ now substantial external debt down."
Therefore, we would pay higher interest rates overall if we lose reserve currency status, and/or our debt gets downgraded. The rate the US Treasury pays on its bonds is the baseline for mortgages and commercial loans. This would make housing LESS affordable, and slow the economy even more, and make the stock market struggle… because if you can get a higher rate with bonds, some investors would tend to prefer bonds.
We owe a minority of the debt to other nations. Somewhere in the realm of $9 trillion ( out of $36 trillion). I’d like to see us pay down those debts and just borrow from our own shores.
Not possible with our very low national savings rate.