The Next Move in the End Game: Obama Bonds

Barack Obama is going to face some tough choices next year. The US government has been running the largest deficits ever in the past couple of months; the official number was $237.2 Billion in the month of October alone and that doesn’t include the money the Fed has been creating and lending and going forward is probably going to be more of the same. Barack Obama said that the government will do “whatever it takes” to get the economy going again and that “we shouldn’t worry about the deficit next year or even the year after.” 

But that begs the question of where all this money is going to come from. We can certainly have the Fed print it up for us, and that would certainly take care of our deflation problem, but hyperinflation is such a poor way to start our a new Presidency. So we are going to need the majority of this money to be loaned to us from other countries the old fashioned way. But therein lies the problem, the US Dollar has increased in value lately as various investments had to be liquidated to repay the US Dollar denominated loans. That’s of course a rather unstable situation, because after the liquidation ends, the Dollar should return to it’s regularly scheduled collapse trajectory that it was on for the majority of this year.

Knowing that the long term value of the dollar is anything but a sure thing, foreign lenders will be reticent to loan us ever increasing amounts of money to fund our Keynesian efforts to spend our way out of this recession. So much so in fact that now the previously unthinkable is being considered: denominated US Government bond obligations in foreign currencies. They are being called Obama bonds and the Japanese Economist Kazuo Mizuno says they are inevitable because “the U.S. cannot finance its deficit by itself. The U.S. financial system cannot survive without foreign investors. We will see ‘Obama Bonds’ in the future”

That’s bad news for the US Dollar. As mentioned previously in this blog, it is only a matter of time before the dollar is no longer the world’s sole reserve currency and being reduced to issuing US bonds in foreign currencies would go a long way towards making that a reality. The main feature of a reserve currency is that it can be used to pay virtually any debt and here the US government would be issuing debts it could not pay in its own currency. Practically, that would require the Federal Reserve to hold other currencies in its foreign exchange reserves; an obligation that it has not be required to do in any meaningful way so far.   Symbolically, it would signify that the US was quickly becoming just like any other debtor nation. How much longer before it starts to get treated in kind on the world stage?

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