US twin deficits and seigniorage – By Mikkel Roland Egesberg – This is about connecting the dots. It’s about the Euro vs. US dollar, the US trade balance, the US Federal budget deficit, the US Federal debt, holders of US debt, and money, lots of money. (Photo: U.S. Federal Reserve Chairman Ben Bernanke is pictured at the financial stability oversight council (FSOC) meeting at the Treasury Department in Washington, November 23, 2010. REUTERS/Jason Reed.)
Euro vs. dollar -

Here is the development in the Euro vs. the US dollar, as you can see, the Euro is gaining strength, and the US dollar is going down. It has already been described in other articles here on, but there are two things going on in the US, the “Twin deficits”. The US has had a trade deficit with the World in all years since 1974+, and this means the US buys more from the rest of the World than it sells. Imagine your own personal finances if you had been spending more money than you earned in all years from 1974 to 2013? This is the situation in the USA, but the US keeps telling the rest of the World it’s good to let the US buy on credit, since it good for business. Would you let your friend continue to borrow money from you for more than 39 years and continue, because he tells you he is a good customer in your shop? Below I have gathered the US trade numbers since year 2000, just to give you the impression:

US trade deficit

In 2011, the US sold goods for 1481 billion US dollars, but bought goods for 2207 billion, a 726 billion shortfall, just in 2011.

The other part of the “Twin deficit” is by the US Federal government. Just like your American friend spends more than he earns, so too does his government, which in 2012 spent 3796 billion US dollars, but collected only 2469 billion dollars, in short spending almost 55% more than it’s income allowed it, or said in another way, the US Federal Government had a deficit of 8,5% of the total American production in that year. The red line below shows the US Federal expenses for different years as percentage of the total economy in the given year, the green line Federal income:

As you can see the US government has spent more money that it earned in almost all years since 1970, so how does it continue to do this? It borrows money. Below we see the development in the US Federal debt since 1970:

As you can see, the debt as % of GDP has gone from around 40% in 1970, to around 60% in 2007 and then exploded to 104,8% in 2012. So who borrows these money to the American government? That would be the Average Joe, what we can call intra Governmental holdings, and the rest of the World, that has allowed the US to buy it’s goods on credit for the last 30+ years. Below you see what the rest of the World owns of US Federal debt:

As you can see above, China is the biggest foreign holder of US federal debt, with 1170 billion US dollars in November 2012. Behind, China is closely followed by Japan, which owns 1133 billion US dollars.

So far the World has continued letting the US consume more than it’s income would otherwise allow it, both with regards to trade and with the US Federal government, by letting the US buy on credit. But if this was your friend, would you let your friend borrow money from you for more than 39 years and continue, because he tells you he is a good customer in your shop? Sooner or later, you would realize your friend can’t keep buying on credit, so you tell him he must pay you somehow. So what does your friend now do instead? He ought to work more to pay for what he had bought and buys from you, but your friend is smart, instead of doing extra work or to cut down on his consumption, he decides to pay you off in US dollars, the only problem is, he prints them himself. And this is what the US does. The US Central Bank, the FED, prints money like there’s no tomorrow, which they choose to call “quantitative easing”, shorted, “QE” and “QE2”, which is just a fancy way to avoid saying “printing money”. If it were only you and your American friend on an island, for how long would you allow your American friend to print US dollars, and buy the goods you had worked so hard to produce with them? Right now FED officially prints $85 billion-a-month in QE, but since there is no transparency, not even the US Congress knows exactly what FED’s balance sheet really looks like. But since FED officially made about $91 billion in “interests” on the tsunami of US dollars it created out of thin air and lend out to banks etc., and sent $88.9 billion of that to the US Federal Treasury in 2012, the US Government is enjoying the invention of the printing press, or what is also know as “seigniorage”.

The only question is, for how long will the World sit by and watch their American friends print US dollars to pay for the huge difference between what they produce and buy from the World.

For how long time will the World be indifferent to the low interest rates they get from the money they lend back to America and it’s Federal government to finance its excessive spending?

The only problem is though, if the World does not continue to accept US dollars, it’s value will collapse, and so will the value of example China’s 1170 billion US dollars placed in US treasury treasuries. In short, China is trapped. Should it continue to accept newly printed US dollars as payment for it’s goods, or should it stop the game and see the value of it’s accumulated US dollars collapse?

You tell me and please vote: – Less Talk, More Facts

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