Yesterday I read an interesting piece from Money Week by Richard Benson; the title of the article was “Who will pay for America’s Bailout?” As my regular readers know, this has been a huge question on my mind. We certainly know that Americans aren’t going to buy up all the U.S. debt, because we don’t have the money to do so. Sure, Americans will buy up some of it, but our debt is increasingly being purchased by foreign countries. Naturally, we would have to assume that they will also be relied on to help finance our new trillion-dollar bailout. Benson points out in his article, though, that there might be a problem with that thinking.
Benson explains that one reason why foreign countries buy up U.S. debt is because American consumers are buying their products. As we buy low-cost goods from China and oil from the Middle East, we give those countries dollars in exchange for their goods. With those dollars, they then turn around and buy U.S. treasuries and other U.S. financial assets. But that series of events could be in jeopardy.
Benson theorizes that, as the U.S. trade deficit narrows and economic hardship further expands into American households, we are going to be sending fewer and fewer of our dollars abroad. With fewer dollars coming in, Benson foresees less interest from foreign countries in buying U.S. debt. The following is from Benson’s article:
“The financial markets are going to slowly realize that the only reason foreign central banks bought Treasuries is because the US bought their goods first! China, as one example, realizes our money is not that good and will take an interest in holding dollars only because we are buying goods and services from them. Foreign countries have no reason to buy massive amounts of Treasury debt unless we buy something from them first.”
Since the U.S. economy cannot function without borrowing obscene amounts of money, we will be left with two options. We can either pay more for the debt, and hope that increases interest to the necessary level, or we can print the money we need. There is, of course, an option three of defaulting on our debt and declaring a nation bankruptcy of sorts, but in reality that is unlikely to ever happen, considering we have the power to print our own money.
Since we can ill afford to pay ever-higher interest rates on our debt for long we would end up looking at option number two at some point. Where does printing more money lead us? You guessed it: Inflation. Benson ends his article with this investment advice:
“My investment plan remains the same. I expect real assets will greatly out-perform financial assets. First, I want to buy gold and silver in physical form whenever I can. In the world of inflation, while cash is king, gold is the emperor! Second, I look to accumulate real assets if they are quality assets and the prices have crashed down. So, I do believe that in a few years even real estate will again be a great inflation hedge!”