Addressing Meaning

It does not matter what you know until you know what it means.

I was told recently that I should own a lot of gold because the United States owes $17 trillion dollars, China is a huge creditor and they can bust the Americans whenever they choose.  Gold is the only salvation.

Interesting, and I suppose if you don’t wonder how the Chinese could come out ahead after doing so, it might make sense.  The other unproven question is, “Could they do it at all?”

I decided to assess.  First I found some fairly recent information on the US federal debt.  It is interesting.

As it turns out China owns about 7% of the total.  Significant but a lot less than my goldbug friend thought.  About one fifth as much.  $1.2 trillion, would be a problem to absorb, but in context it is less than one month worth of American GDP.  If you earn $48,000 per year after taxes and other deductions, and a creditor asks you to repay $4,000, you could likely do it without a severe dislocation.  The Americans have more resources than you or I, and would suffer, but not fatally.

Who owns the rest of the debt?

Foreign holdings total $5.7 trillion.  $4.5 trillion not Chinese.  Japan is about $1 trillion.  Brazil is fourth at $254 billion.  Russia and the UK among others are in and around $150 billion.  Barely couch change.

The remaining $12 trillion is owed internally and of that almost $7 trillion is owed to the Federal Reserve and to various government agencies, pension plans, healthcare funds and other trust-like funds.  The last $5 trillion is owed to state pension plans, insurance companies, banks, mutual funds and individuals.

The threat of China toppling the system seems remote, but on examination, there is an obvious blemish in the debt structure.

The government is counting some of the money as both an asset and a liability.  How does it make sense to put federal employee pension plan and social security money into government bonds?  It is like owing money to yourself.

If I take $3,000 out of my retirement fund to buy new golf clubs, and replace it with an IOU, is the total of assets in my retirement plan unchanged?  If I pay interest on the IOU does that make it better?

How is the American government tactic different?

Answer: it is not.

They will have to replace the cash some other day and will do so by borrowing real cash from someone if they can, or by collecting taxes. Again if they can.

I think when this particular chicken heads home to roost, it might be the time to own metals.  Assuming of course the government does not confiscate them and revalue the currency.

Knowing about the debt or anything else for that matter, does not automatically define a required tactical action.

Pay no attention to fear, feelings and the opinion of those who stand to benefit from your listening to them.  Pay only a little attention to precise numbers.  Pay considerable attention to what the numbers mean.

Your life will make more sense and your decisions will be more durable.

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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com  

 

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