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Saturday, September 7, 2013

Who Is Going To Buy Our Debt If This War Causes China, Russia And The Rest Of The World To Turn On Us?

By Michael Snyder, on September 6th, 2013
Can the U.S. really afford to greatly anger the rest of the world when they are the ones that are paying our bills?  What is going to happen if China, Russia and many other large nations stop buying our debt and start rapidly dumping U.S. debt that they already own?  If the United States is not very careful, it is going to pay a tremendous economic price for taking military action in Syria.  At this point, survey after survey has shown that the American people are overwhelmingly against an attack on Syria, people around the globe are overwhelmingly against an attack on Syria, and it looks like the U.S. Congress is even going to reject it.  But Barack Obama is not backing down.  In fact, ABC News is reporting that plans are now being made for a "significantly larger" strike on Syria than most experts had expected.

If Obama insists on going forward with this, it will be the greatest foreign policy disaster in modern American history.

Right now, both Russia and China are strongly warning Obama not to attack Syria.  And Russia is not just warning Obama with words.  According to Bloomberg, Russia has sent quite a collection of warships into the region...
Russia is sending three more ships to the eastern Mediterranean to bolster its fleet there as a U.S. Senate panel will consider President Barack Obama’s request for authority to conduct a military strike on Syria.

Russia is sending two destroyers, including the Nastoichivy, the flagship of the Baltic Fleet, and the Moskva missile cruiser to the region, Interfax reported today, citing an unidentified Navy official. That follows last week’s dispatch of a reconnaissance ship to the eastern Mediterranean, four days after the deployment of an anti-submarine ship and a missile cruiser to the area, which were reported by Interfax. Syria hosts Russia’s only military facility outside the former Soviet Union, at the port of Tartus.

China is also letting it be known that they absolutely do not want Obama to hit Syria.  On Friday, China issued a warning about what military conflict in the Middle East could do to "the global economy"...

"Military action would have a negative impact on the global economy, especially on the oil price – it will cause a hike in the oil price."
And according to Debka, China has also deployed "a number of warships" to the region...

Western naval sources reported Friday that a Chinese landing craft, the Jinggangshan, with a 1,000-strong marine battalion had reached the Red Sea en route for the Mediterranean off Syria.  According to DEBKAfile, Beijing has already deployed a number of warships opposite Syria in secret. If the latest report is confirmed, this will be the largest Chinese deployment in the Middle East in its naval history.

If the U.S. attacks Syria, Russia and China probably will not take immediate military action against us.

But they could choose to hit us where it really hurts.

According to the U.S. Treasury, foreigners now hold approximately 5.6 trillion dollars of our debt.  Over the past couple of decades, the proportion of our debt owned by foreigners has grown tremendously, and today we very heavily depend on nations such as China to buy our debt.

At this point, China owns approximately 1.275 trillion dollars of our debt, and Russia owns approximately 138 billion dollars of our debt.

So what would happen if China, Russia and other foreign buyers of our debt all of a sudden quit purchasing our debt and instead started dumping the debt that they already own back on to the market?

In a word, it would be disastrous.

As I have written about previously, the U.S. government will borrow about 4 trillion dollars this year.

Close to a trillion of that is new borrowing, and about three trillion of that is rolling over existing debt.

If China and other big foreign lenders quit buying our debt and started dumping what they already hold, that would send yields on U.S. Treasuries absolutely soaring.

And we have already seen bond yields rise dramatically in recent weeks.  In fact, on Thursday the yield on 10 year U.S. Treasuries briefly broke the 3 percent barrier.

So what is going to happen if the yield on 10 year U.S. Treasuries continues to go up?  The following are a few consequences of rising bond yields that I have discussed in previous articles...

-It will cost the federal government more to borrow money.
-It will cost state and local governments more to borrow money.
-As bond yields go up, bond values go down.  In the end, rising bond yields could end up costing bond investors trillions of dollars.
-Rising bond yields will cause mortgage rates to skyrocket.  In fact, we are already starting to see this happen.  This week the average rate on a 30 year mortgage hit 4.57 percent.
-Higher interest rates will mean a slowdown in economic activity at a time when we definitely cannot afford it.
-As economic activity slows down, that will be very bad for stocks.  When the next great stock market crash happens (and it is coming), equity investors could end up losing trillions of dollars of wealth.
-Of course the biggest threat of all is the 441 trillion dollar interest rate derivatives time bomb that is sitting out there.  Rapidly rising interest rates could potentially bring down several of our "too big to fail" banks in rapid succession and throw us into the greatest financial crisis the nation has ever seen.

Are you starting to get the picture?

And the 3 percent mark is just the beginning.  Brent Schutte, a market strategist for BMO Private Bank, told CNBC that he expects the yield on 10 year U.S. Treasuries to eventually go up to 6 or 7 percent...

"4 percent (on 10-year Treasurys) somewhere around the end of the year to early next year would be a good intermediate-term level. And if you look over the longer term, I don't think that 6 or 7 percent is out of the question."

If that happens, we will experience a full blown financial meltdown.

Of course it would greatly help if Obama would back down and not attack Syria.  As Vladimir Putin noted at the G20 summit, large nations such as India, Brazil, South Africa and Indonesia are all strongly against the U.S. taking military action...

In reply to the question what other country in the world may theoretically be subjected to aggression similar to that Syria is facing, Putin said, “I do not want to think that any other country will be subjected to any external aggression.”

A military action against Syria will have a highly deplorable impact on international security at large, Putin emphasized.

He said he was surprised to see that ever more participants in the summit, including the leader of India, Brazil, the South African Republic, and Indonesia were speaking vehemently against a possible military operation in Syria.

Putin cited the words of the South African President, Jacob Zuma, who said many countries were feeling unprotected against such actions undertaken by stronger countries.

“Given the conditions as they, how would you convince the North Koreans, for example, to give up their nuclear program,” he said. “Just tell them to put everything into storage today and they’ll be pulled to bits tomorrow.”

He underlined the presence of only one method for maintaining stability - “an unconditional observance of international law norms.”

Can we really afford to have most of the international community turn on us and quit buying our debt?

Of course not.

Sadly, as I noted the other day, Obama appears to be locked into doing the bidding of Arab countries such as Saudi Arabia and Qatar.

In fact, as the Washington Post reported the other day, Secretary of State John Kerry has even admitted that they are even willing to pay all of the costs of a U.S. military campaign that would overthrow Assad... Much more>>