Trump has a serious problem on his hands.
Foreign creditors are selling U.S. government debt like never before.
Last year, China alone sold $188 billion worth of U.S. Treasurys. That’s the most it’s ever sold in one year.
Now, China still holds about $1.06 trillion worth of U.S. government debt.
That might sound like a lot. But China hasn’t held this little U.S. debt since 2010.
• Japan’s unwinding its Treasury position, too…
It sold about 2.4 trillion yen ($21 billion) worth of U.S. debt in December.
Japan hasn’t sold that much U.S. government debt in one month since 2013. More importantly, Japan has now cut its position in U.S. Treasurys two years in a row.
• This is a serious matter…
Japan and China are America’s biggest creditors. Together, they own more than $2 trillion worth of U.S. government debt.
But they’re not the only ones pulling out of the U.S. Treasury market, either.
Saudi Arabia, Belgium, and Switzerland have recently become net sellers, too. This means they’re selling more Treasurys than they’ve been buying.
• If this continues, the U.S. government could be in big trouble…
You see, the Treasury market is where the U.S. government borrows money.
Today, foreign creditors own about $6 trillion worth of U.S Treasurys. That’s nearly half of the $14 trillion Treasury market.
For years, countries like China, Japan, and Saudi Arabia couldn’t get enough of U.S. debt. Now, they’re selling Treasurys like they’re going out of fashion. Just look at the chart below.
• We can’t blame these countries for lightening up on Treasurys…
The U.S. government is flat broke…
According to its own calculations, the government is $20 trillion in debt. That’s twice as much debt as it had a decade ago.
Unfortunately, the situation is far worse than the government admits.
You see, the “official” debt number doesn’t include Social Security, Medicare, or Medicaid. According to the government, these programs pay for themselves.
Of course, everyone knows this is nonsense.
These programs don’t pay from themselves. They’re critically underfunded.
If you count these programs, the total national debt shoots well past $100 trillion. Some analysts even peg the actual debt as high as $200 trillion. That’s 10 times the U.S. economy’s annual economic output.
In short, the government is hopelessly insolvent. It has more debt than it could ever pay back.
Sooner or later, this mountain of debt will destroy the U.S. financial system. The “good news” is that this crisis could be years away.
The bad news is we have even more pressing problems.
• Trump is agitating America’s biggest creditors…
If you’ve been watching the news, you know what we’re talking about.
In the last few weeks, Trump has accused Japan and China of manipulating their currencies. On Friday, he called China the “grand champions” of currency manipulation.
Now, Trump may have a point. But let’s be honest.
He’s not doing America any favors by attacking its largest creditors.
If he keeps this up, China and Japan could retaliate by selling even more Treasurys.
This could cause Treasury yields to soar, which happens when bond prices fall.
And that’s the last thing the government can afford…
• Trump wants to spend $1 trillion rebuilding America’s aging infrastructure…
This sounds like a great idea.
After all, America’s infrastructure is in desperate need of repair. And new infrastructure projects could put a lot of Americans to work.
There’s just one problem…
Trump also wants to cut taxes. This means the government will have to borrow a lot of money to fix our roads and bridges.
That’s not going to come cheap if the sell-off in Treasurys continues.
• Rising Treasury yields are a serious threat to millions of everyday people, too…
Since the 1980s, Treasury bond prices have basically gone straight up.
This bull market survived three recessions, the dot-com bubble, and the last housing crisis.
When an asset does this well for this long, investors become complacent.
They buy it without thinking. They act like nothing can go wrong.
But almost nothing is going right for the Treasury market these days.
Unless this changes fast, people who own Treasurys could be in serious danger.
If you haven’t already, we encourage you to get out of Treasurys now.
Chart of the Day: Another Reason to Own Gold
Central banks are loading up on gold.
Today’s chart shows how much gold central banks bought every year since 1995.
You can see they sold more than 10,000 tons between 1995 and 2009.
Since then, central banks have been buying as much gold as they can get their hands on.
Now, we’re not fans of central bankers. But we’re also not fools…
You see, central banks run the global monetary system. They have deep pockets.
In other words, you don’t want to bet against them. You want to invest alongside them.
And right now, they’re loading up on gold.
We don’t expect this to change anytime soon.
Think about it. If Japan, China, and other countries keep selling Treasurys, they’re going to end up with a lot of extra cash. If they use just some of that money to buy bullion, the price of gold could soar.
This is just one more reason to own gold for the long haul.
Delray Beach, Florida
February 28, 2017
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