The US government can’t possibly pay back its $14-trillion debt. Not fairly, at least.
Instead, its strategy is to devalue the US dollar so that the nominal value of the $14-trillion debt becomes less in real terms.
Since the 2008 financial crisis, the Federal Reserve has printed and lent trillions of dollars, thereby expanding the supply of US dollars and cheapening its value. Moreover, it has kept interest rates at 0.25 percent, which paves the way for more money- creation through the fractional-reserve banking system.
The US government used this strategy of dollar devaluation from the mid-1940s to 1979 to shave off its WWII debt. Now, it’s looking to deploy it again.
On top of it all, the Federal Reserve has conducted direct purchases of medium- and long-term Treasuries through QE1 and QE2. These programs are essentially more money-creation but targeted at the Treasury market.
Foreign holders of US Treasuries, led by China, have cried foul over QE.
A Chinese government-backed ratings agency said QE2 is “an obvious trend of depreciating the U.S. dollar” and “entirely encroaches on the interests of the creditors.”
Since last October, China’s holding of US Treasuries have steadily slipped and other foreign central banks have followed suit.
Certain US holders of Treasuries, however, may not have the choice to shun them because they’re such an ingrained part of the US financial system.
These holders are simply compelled to buy because of indexation, convention, or regulatory guidelines, said Bill Gross of PIMCO, who manages the world’s largest bond fund.
Gross called selling Treasuries to these people “financial repression.” Other terms he used to describe this practice are “pocket-picking” and “skunking.”
It is this method, and the pockets of these US buyers, that will eventually enable the US to stabilize its enormous debt level. The US government prefers the method of financial repression’ (versus an overt tax) because it’s politically easier this way – indeed, some don’t even recognize the practice of taxation through devaluation.