Bloomberg News reports two-year notes issued by Berkshire Hathaway, Inc. (BRK-A) are currently yielding 3.5 basis points less than two-year U.S. Treasury notes. Debt issues by Proctor & Gamble Co. (PG), Johnson & Johnson (JNJ), and Lowe’s Companies (LOW) are also priced lower than U.S. government debt.
Part of the reason is that companies are lowering their debt levels. U.S. companies included on the S&P 500 have cut their debt by $282 billion to $7.1 trillion, about 28% of assets and the lowest amount in a decade. The improvement in company balance sheets should continue to improve as the government’s balance sheet continues to deteriorate, narrowing the spread even more.
Projections of U.S. debt are not encouraging. By 2020, US debt could be as high as 90% of GDP. Can the federal government do anything to stop this vicious trend? And if so, what?
That depends on who you ask. Some economists believe that the Federal Reserve, which bought $1.7 million worth of 10-year Treasuries last year should buy even more this year, some $2 trillion worth. Because the rates on the 10-year notes is substantially higher rates on the short-term notes, a quantitative easing of this size can only push the 10-year rate down.
On the other side of the argument, there are many others who believe that containing Uncle Sam’s debt requires spending cuts and a strong dollar, which will only come about if interest rates rise and head off a coming round of inflation.
Probably the single biggest impact to U.S. debt troubles would come from a revaluation of the Chinese renminbi. Because China now owns nearly a trillion dollars worth of U.S. Treasuries and continues to buy more, the value of the U.S. dollar remains higher than it would be if the Chinese yuan were floating freely. The Chinese can’t stop buying Treasuries either, because the minute they do, the value of China’s currency will rise making their exports more costly in dollars and U.S. imports less so.
This works only if U.S. GDP grows as a result. That is what should happen, and if it does the U.S. could finance its debt on its own by reducing its budget deficit just through the effects of that growth. And, of course, some tax increases.
China has so far refused to allow its currency to appreciate fully. Perhaps the Chinese government is planning to start buying private US assets like real estate and businesses. That’s one way they could launder all the dollars China holds. Such a course would raise a hue and cry in the US that would make the recent health care debate seem positively civil in retrospect.
In the short term, U.S. debt remains an issue and how to deal with it will raise the rhetorical heat in Congress to an even higher temperature. But the US has a lot of weapons available if President Obama has the will to pull the trigger. None of the weapons will be popular, tax increases least of all. Don’t count Uncle Sam out yet.
