Why America’s bond problem could become your mortgage problem

1. Its federal debt load was a crushing, record-high US$40 trillion.
2. Its deficit was projected at roughly 5.8 per cent of GDP, versus 3.8 per cent historically.
3. Its central bank’s favoured inflation measure was 170 basis points above target.
4. It effectively borrowed to pay the interest on its debt, what economist Hyman Minsky called ‘Ponzi finance.'”
5. Its US$1.25 trillion in annual net interest payments exceeded its entire defence budget and was projected to soar from 18.5 per cent to 25 per cent of revenue in 10 years.
6. A one per cent higher rate could explode its interest costs by US$3.5 trillion over ten years, accelerating a potential future debt spiral.
7. The term (risk) premiums on its bonds were steadily rising.
8. Its central bank was signalling a rate-hike bias.
9. It had imposed widespread, largely unjustified and inflationary tariffs, including on its allies.
10. It engaged in trade wars with allies that violated its president’s own trade pact and relied on legally questionable, untested and out-of-date trade laws.
11. It was trapped in a costly, inflationary war with no end in sight.
12. It had lost an array of key steady-keel investors, with foreign central banks and official entities having significantly reduced their share of its debt, from 40 per cent during the 2008 financial crisis to 12 per cent.
13. Nervous foreign investment officials were increasingly announcing plans to pull billions in assets (e.g., gold) out of the country.
14. Its debt was projected to grow faster than its economy.
15. It was in the midst of the largest capital expenditure cycle in history (as measured in dollar terms) — a significant inflationary impulse.
16. It hadn’t reached its two per cent inflation target in nearly five and a half years.
17. Its aging population threatened to ramp up its entitlement costs and bond issuance.
18. It relied on a risky rollover strategy of issuing short-term debt to pay off its long-term liabilities in a rising-rate market.
19. Its immigration policies threatened wage inflation.
20. Its bond prices were diving to multi-year lows.
21. Its credit rating had been trending downward, and one more downgrade could cost it hundreds of billions in additional interest payments annually.
22. Its president continually tried to manipulate its central bank into ignoring inflation risk — in order to keep rates lower and make the Treasury’s debt service easier.
23. Its tariffs were alienating foreign investors.
24. Other countries could slowly chip away at its reserve status, threatening international demand for its bonds.
25. Its president had effectively proposed an inflationary $5,000 bribe to each adult citizen if his party were voted back into power in November.
26. It hadn’t balanced a budget in a quarter century.
27. Its debt ceiling limits continually threatened timely payments to bondholders, with ongoing government shutdowns signalling persistent dysfunction.
28. Its politicians refused bipartisan cooperation to balance budgets by raising taxes or lowering benefits.
29. If long-run growth disappoints, its fiscal status and credit could weaken.
30. Depreciation of its currency created a risk of loss for investors — and currency hedging consumed too much yield.
31. There was evidence that its bonds were becoming less liquid during times of stress, reducing its safe-haven status.
32. The traditional safe-haven status of its bond market did not protect against the growing dangers of its own inflation shock or a confidence shock in itself.
33. Arbitrary sanctions could freeze a foreigner’s bond holdings.

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