Jim, I would love your comment in a future podcast on the topic of foreign purchase of treasuries. I think I tagged you recently in a couple X posts on topic from Balaji. Here is the point stated in two different way:
(1) To say that USA pays $$$$$$$$$$$$ for NATO and the rest of the countries each pay $ for NATO is false because we are mass exporting our treasuries to our European allies while we simultaneously inflate away the value of these "investments." Balaji talks about it as if the NATO countries pay us a form of protection money, in the mafia sense, through treasury purchase.
(2) The American Empire has been able to distribute our inflation across the world rather than just on our own population here in the USA. The math of our situation looks much uglier moving forward if the world stops buying our treasuries, and that will be an increasingly likely result based on the current course that you well outline in your podcast.
Would love your thoughts on Balaji's ideas, which I probably didn't state as clearly as he did.
Right, I get it. There are definitely two sides to the argument. They buy our debt, and we provide the defense umbrella. Is this a fair trade? You can argue that Europe is free-riding on US defense or that the USA is free-riding on exported inflation, as you pointed out. I don't know which side is free-riding more, but the fact that this arrangement is no longer satisfactory to the USA tells me it will change. Simply put, we are broke and can't afford it much longer - especially in light of China's growing military capabilities. We are stretched too thin, hence Trump's policies, such as threatening to de-fund NATO and retrenching to the Western Hemisphere.
On the question of who will buy America's debt, the trend of foreign buying seems clear. The biggest foreign holders of Treasuries - China and Japan - are not increasing their holdings even as the total US debt balloons. So, as I pointed out in Black Hole, the USA needs to find new lenders and cut expenses wherever it can. This will be a multi-faceted problem, consisting of: some debt-monetizing (the Fed and the commercial banks will be back in the Treasury market); possibly forcing US savings institutions to buy Treasuries; asking foreign countries to purchase Treasuries in exchange for favorable terms of trade or tariff concessions; selective spending cuts that don't get politicians thrown out of office. Interest rate suppression, etc etc.
Did you ever see that "I Love Lucy" episode in the chocolate factory? As the line speeds up, Lucy starts stuffing chocolates anywhere she can - pockets, hat, under the counter, in her mouth, etc. That's what the US has to do with its Treasury debt - get desperate and get creative and find new places to stuff the debt.
Here's one of his posts on his version of a better solution. It's hard for me to know who is right because of course so many 2nd and 3rd order impacts these decisions. https://x.com/balajis/status/1895904737800946093
I think you're right. Interestingly, in his long November interview with the Manhattan Institute, Scott Bessent briefly referred to reforming entitlements in a "later administration." I think he believes that Americans are just not ready for it yet, so he will do what he can in the present, hoping projects like DOGE will wake people up to reality. Sometimes I wonder: Why was Argentina ready to elect a man who campaigned on: "There is no money" for entitlement programs, but Americans are not ready for it? I believe the answer is that Argentinians saw the concrete evidence when they all became poor, so they are ready for something new. I hope America doesn't have to reach that state before we are willing to reform.
I wonder to what extent politicians may just be willing to let entitlements reform themselves through the automation built into them. As Musk pointed out recently on Rogan, social security is a Ponzi scheme. As best I can tell, Medicare is, too. Given the population dynamics, the math shows the trusts run of $$ in the early 2030's.
But that doesn't mean there is no money for these programs and all payments stop. There are still payroll taxes to fund them in a non-Ponzi scheme way. If GPT is right, the mechanics of these programs are such that once the trust funds run out, they would rely only on incoming payroll taxes. These taxes would still support these programs at reduced levels of 77% and 89%, respectively, when the trusts run out.
Perhaps this automated solution is more palatable than the alternatives (politically speaking). At this point, the public may be open to reform because politicians could point out things could get even worse based on longer life expectancy, lower birth rates, and future recessions.
Jim, I would love your comment in a future podcast on the topic of foreign purchase of treasuries. I think I tagged you recently in a couple X posts on topic from Balaji. Here is the point stated in two different way:
(1) To say that USA pays $$$$$$$$$$$$ for NATO and the rest of the countries each pay $ for NATO is false because we are mass exporting our treasuries to our European allies while we simultaneously inflate away the value of these "investments." Balaji talks about it as if the NATO countries pay us a form of protection money, in the mafia sense, through treasury purchase.
(2) The American Empire has been able to distribute our inflation across the world rather than just on our own population here in the USA. The math of our situation looks much uglier moving forward if the world stops buying our treasuries, and that will be an increasingly likely result based on the current course that you well outline in your podcast.
Would love your thoughts on Balaji's ideas, which I probably didn't state as clearly as he did.
Right, I get it. There are definitely two sides to the argument. They buy our debt, and we provide the defense umbrella. Is this a fair trade? You can argue that Europe is free-riding on US defense or that the USA is free-riding on exported inflation, as you pointed out. I don't know which side is free-riding more, but the fact that this arrangement is no longer satisfactory to the USA tells me it will change. Simply put, we are broke and can't afford it much longer - especially in light of China's growing military capabilities. We are stretched too thin, hence Trump's policies, such as threatening to de-fund NATO and retrenching to the Western Hemisphere.
On the question of who will buy America's debt, the trend of foreign buying seems clear. The biggest foreign holders of Treasuries - China and Japan - are not increasing their holdings even as the total US debt balloons. So, as I pointed out in Black Hole, the USA needs to find new lenders and cut expenses wherever it can. This will be a multi-faceted problem, consisting of: some debt-monetizing (the Fed and the commercial banks will be back in the Treasury market); possibly forcing US savings institutions to buy Treasuries; asking foreign countries to purchase Treasuries in exchange for favorable terms of trade or tariff concessions; selective spending cuts that don't get politicians thrown out of office. Interest rate suppression, etc etc.
Did you ever see that "I Love Lucy" episode in the chocolate factory? As the line speeds up, Lucy starts stuffing chocolates anywhere she can - pockets, hat, under the counter, in her mouth, etc. That's what the US has to do with its Treasury debt - get desperate and get creative and find new places to stuff the debt.
Here's one of his posts on his version of a better solution. It's hard for me to know who is right because of course so many 2nd and 3rd order impacts these decisions. https://x.com/balajis/status/1895904737800946093
Thank you, Jim, for including that PDF for those of us who prefer reading to watching/listening to a video!
You're welcome. The PDF is a little sketchy, i.e., not perfectly edited, but I wanted to get it out promptly.
Jim,
Interesting analysis - thanks. I hope you're right, but I won't put any trust in Trump/Bessent until I see entitlements reform explicitly addressed.
I think you're right. Interestingly, in his long November interview with the Manhattan Institute, Scott Bessent briefly referred to reforming entitlements in a "later administration." I think he believes that Americans are just not ready for it yet, so he will do what he can in the present, hoping projects like DOGE will wake people up to reality. Sometimes I wonder: Why was Argentina ready to elect a man who campaigned on: "There is no money" for entitlement programs, but Americans are not ready for it? I believe the answer is that Argentinians saw the concrete evidence when they all became poor, so they are ready for something new. I hope America doesn't have to reach that state before we are willing to reform.
I wonder to what extent politicians may just be willing to let entitlements reform themselves through the automation built into them. As Musk pointed out recently on Rogan, social security is a Ponzi scheme. As best I can tell, Medicare is, too. Given the population dynamics, the math shows the trusts run of $$ in the early 2030's.
But that doesn't mean there is no money for these programs and all payments stop. There are still payroll taxes to fund them in a non-Ponzi scheme way. If GPT is right, the mechanics of these programs are such that once the trust funds run out, they would rely only on incoming payroll taxes. These taxes would still support these programs at reduced levels of 77% and 89%, respectively, when the trusts run out.
Perhaps this automated solution is more palatable than the alternatives (politically speaking). At this point, the public may be open to reform because politicians could point out things could get even worse based on longer life expectancy, lower birth rates, and future recessions.