Obama Bonds

While very few people seem to know what is really going on, everyone seems to have figured out by now that whatever it is, it’s getting worse. But if you think Americans are worried, just imagine how the people who lend us money feel.

Well, the Japanese, long time major creditors of the United States, are plenty worried.  They want to lend us money, and we want to borrow it – which certainly sounds like a situation that can make everyone happy – but there is a small problem. The Japanese earn and invest money in Yen, and they already own pretty much all of the dollar-denominated debt they want. They’d like to buy bonds that generate income in Japanese Yen. You can see how this would be very beneficial because they wouldn’t have to worry about being paid back in dollars that might… I don’t know… be worth slightly less in the future than they are today.

As you might expect from the land of the ingenious people who sell us really cool gadgets, they have a plan: Why doesn’t the United States Treasury simply issue debt in Japanese Yen? That way, Japanese would happily lend us money, and all we would have to do in return would be to pay them back in their own currency – which doesn’t seem too outrageous. However, it does seem slightly odd that we would owe Japan yen, the value of which is controlled by their own central bank.

A more proper solution seems to be that they would simply refuse to buy treasuries that are yielding so little, which would drive interest rates in the United States a bit higher, until the level was reached where the perceived risk matched the perceived reward. It doesn’t look like that’s about to happen any time soon though, as on Friday short term treasuries reached a mind-numbingly low yield of 0.01%, which is presumably something of a limit.

You might be thinking, “Has anything like this ever happened in the history of the world – where one nation issued debt in a currency controlled by a foreign central bank?” Well, as it turns out, in November of 1978 President Carter encouraged foreign countries to lend us money by issuing a few “Carter Bonds” available in Deutsche Marks and Swiss Francs. And just so we’re all on the same page, the world didn’t end. Word on the street is that we came pretty close though.

As Iceland recently discovered, the last resort – or consequence – of a country that burdens itself with too much debt is the collapse of its currency. This allows a government to repay on its loans in “cheaper” units of currency (sometimes it is simply printed up and sent to the creditors). Sadly, many Icelanders agreed to repay their mortgages in foreign currencies while their incomes were in the now-crashed Icelandic krona. They did this because they could get much better interest rates on their loans which seemed to make a lot more sense than taking out debt at higher interest rates in their own currency – sounds familiar. These days though, they are taking to the streets, where a protestor remarked:

I don’t trust the government, I don’t trust the banks,
I don’t trust the political parties, and I don’t trust the IMF.
We had a good country here and they’ve ruined it.

Put my vote down in the column that hopes “The Office of the President-Elect” decides that issuing debt in foreign currencies is a really bad idea.