Printer Friendly

eMail Article

October 02, 2009

The Hidden Costs Of Borrowing
by Daniel Aaronson and Lee Markowitz

Borrowing trillions of Dollars from foreigners has its costs. While the interest or financial expense is one component of the ultimate burden, other far higher costs have gone largely unnoticed until now.

A country which relies on foreigners for credit can lose political power in the global economy. On September 26th, the White House released a statement that "leaders endorsed the G-20 as the premier forum for their international economic co-operation," replacing the G-8 in that role. Even though the G-20 has met regularly, this formal announcement signifies a change in the balance of power from the United States and the developed countries to the emerging countries of the world. The timing quite clearly coincides with the United States' current economic dilemma. Because the United States is relying on foreigners to fund its budget deficit, developing countries are taking power analogous to the situation when a lender seizes collateral of a defaulting borrower.

The power grab by the developing countries within the G-20 supports the basis for why foreign nations have continued to fund US deficits despite the real threat of the US debasing the Dollar. Commonly believed reasons for why foreign central banks buy US debt are its liquidity, that foreign central banks will suffer huge losses on existing holdings if they do not support the US Dollar, or that their own economies will suffer without funding American consumption. Despite these claims, foreign buying of US debt at such low yields is economically unsound. Instead, it is possible that these central banks are strategically allowing the US to dig its own grave. While foreign nations, especially China, will ultimately take losses on its US Treasury holdings, these nations may view such losses as an investment in their long-term strategic interests. If so, the cost of borrowing for the United States is extraordinarily high when considering the power it is ceding within the global landscape.

In addition to ceding power to the G-20, there is another expense associated with massive borrowing to fund the government's budget deficit. That cost is the increasing scrutiny of the Dollar as the world's reserve currency. Although today our creditors are only talking about replacing the Dollar as the world's reserve currency, those discussions will ultimately lead to action. When that occurs, the costs from inflated consumer prices and higher long term interest rates will certainly outweigh the mere burden from growing interest payments.

The supremacy of the United States is under attack. The transition from the G-8 to the G-20 is critically important because it shows that there is a much greater price to pay than the financial expense of our trillion Dollar deficits. If the United States continues down this path, the ominous costs of relying on foreign borrowing will become evident.

Daniel Aaronson
Lee Markowitz CFA
Continental Capital Advisors, LLC

Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.

Copright 2009 © Continental Capital Advisors, LLC

Image rendition and html coding Copyright © 2000-2009 SafeHaven.com

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »