Tuesday, May 26, 2009

We only owe to ourselves

The monetization of private debt by the Fed is reaching epic proportions. But as someone said to me recently, we only owe it to ourselves. Indeed. Last week one of the candidates for Japanese prime minister announced, if he is elected he will not buy anymore US$ denominated debt. The Chinese continue to calmly extricate themselves quietly from the US tar baby by buying hard assets and productive manufacturing capacity worldwide and by reaching swap arrangements with Asian trading partners to have debt denominated in remembi. Quite possibly we only owe to ourselves because we are the last suckers left.

Since we only owe it to ourselves, just exactly how do we pay it back? By raising taxes? By devaluing the debt via inflation? By simply canceling it? Ironically growing out of it, which seems to be the current whistling past the graveyard approach, will be much harder as more and more assets focus on debt service and not productive economic activity.

(click to enlarge)

John Barnyak