The headlines last week read: “Bolivia is now using China’s Yuan for trade, challenging global dominance of US Dollar”; and the “Dollar is dying!” Folks raised their glasses in a toast.”
Bolivia—no disrespect intended —is an afterthought on the global economic stage with an economy smaller than Uganda and Myanmar. Bolivia’s total external debt is a bit larger than 10 percent of the Philippines’ external debt. However, while the Philippines holds roughly $100 billion in foreign exchange reserves, Bolivia’s foreign reserves is $300 million, smaller than Moldova and Cameroon.
Bolivia’s foreign reserves cannot cover even one month of its imports, as its reserves equaled only 0.4 months of imports in May 2023. The Philippines Foreign Exchange Reserves equaled 7.9 months of imports in May. To meet its trade obligations, using the yuan may be its only alternative to stay in business.
In January 2019, 45 percent of all global trade was settled in US dollars. In April 2023, that percentage increased to 59.74 percent. The “de-dollarization” folks seem to be like relatives waiting for their rich uncle to die, and he just keeps living on and on.
Of greater concern than the “Death of the Dollar” should be the potential for the “Death of the Debt.”
Understand that government or sovereign debt is never marked “Paid in Full.” Yesterday’s loan is ‘paid off’ by a new loan tomorrow. However, the total amount of a government’s debt keeps increasing. The only times in history that the US government debt actually decreased was in 1947, 1948, and 1951 under Truman and under Eisenhower in 1956 and 1957.
“The US Treasury Department increased its net borrowing estimate for the July-September quarter to $1 trillion. This amount was exceeded only during the Covid quarter of Q2 2020.”
Many of the K-Pop style economists use data that is meaningless, such as debt-to-GDP ratio, comparing a country’s public debt to its gross domestic product. A lender to a government does not care how much the total debt is as long as the country can pay the interest on time.
As of March 2023, the Japanese public debt is equal to 263 percent of its GDP, and the percentage of government spending for its debt service is 24 percent. In the US, debt servicing takes up 6.8 percent of the budget, and for the Philippines the percentage for interest payments is 11.6 percent.
Read the article under the headline “PHL debt stock hits fresh record high of P14.15T in June” and see if you can find one word about the cost of paying the debt service.
And here is the kicker for Japan. The Central Bank of Japan holds 52 percent of all Japanese government debt. The US Federal Reserve owns about 20 percent of US government national debt.
So, what’s the debt problem? It is not Sri Lanka, Pakistan, or Argentina as we are constantly told when discussing sovereign debt. Massive amounts of “First World” debt suck money out of the economy especially now that interest rates going up make lending to these governments financially attractive. Regardless of the political nonsense, these “First World” governments do not spend the borrowed money productively. They effectively use it to “buy votes.”
The Philippines and similar nations borrowed heavily during the pandemic, in effect to feed citizens who were suffering. The US and the rest borrowed to “stimulate the economy” and give the illusion that “Don’t worry, things will be fine soon. We have it under control.”
The one trillion dollars that the US government will borrow in the next three months will come from the private sector, and that money will not be used to “build factories,” create jobs, or even build infrastructure, which is more government nonsense. It will be used to service the past government debt that also did not “build factories,” create jobs, or build infrastructure.
The “First World” Sovereign Debt Crisis is not about “The Debt.” It is about effective and productive private financial resource allocation, which the majority of the current debt does not provide. The death of this kind of debt will come eventually. And the fallout will be catastrophic.
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