Sjeltur

For years now the US is spending way more than it earns. The enormous trade deficit (more imports than exports) of the US is the silent witness here. In 1990 the trade deficit was $109 billion, a decade later it was already $436 billion. Despite the economic crisis, the deficit was $800 billion last year, only slightly lower than the $817 billion in 2006, a record high. The import of goods from China is responsible for more than $250 billion of the trade deficit, and the Chinese used a lot of this money to borrow it to the US: the US buys Chinese stuff, the dollars earned by the Chinese are shipped back to the US as a loan. But this recycling of money is going to end, China is closing the money tap.

The chart below shows in black the three month moving sum of the US trade deficit in billion dollars, the deficit is clearly shrinking. In red the increase of new government debt is shown, starting in January this year the increase is rising sharply.

Last Saturday the People’s Bank of China announced that in the first quarter of this year China’s reserves increased by $7.7 billion, that’s $146.2 billion less (!) than in the same period last year. The chart below shows that the Chinese are lowering the amount of money they borrow to the US already, it shows the 13 week rate of change of US debt monetized by the Fed, annualized. Shortly after the sharp increase of new government debt, the Fed was forced to create new money, because China is cutting back the amount of dollars they send back to the US.

The US government relied on the recycling of the trade deficit for years and continued to borrow from the world, but most notably from China. Now the crisis has arrived, and the Obama administration thinks there is only one way to get out of the crisis: spending money like there is no tomorrow. US budget deficits are exploding, but at the same time the willingness abroad to borrow money to the US is declining. The US government has to rely more and more on the Fed to finance all government spending. Never before in history we’ve seen irresponsible monetary policies like now. Obama thinks government spending will save the US economy, but it’s much more likely it will end in a catastrophe. If you’re American, now it’s probably the time to prepare in case the monetary dung hits the proverbial fan, make sure you’re ahead of the herd. The general public seems to be unaware of the dangers of unlimited government spending, but this is slowly changing.