What a mess! There are so many things going on right now that affect so many different areas of interest. We have domestic and internation political issues. We have domestic and international economic issues. We have social issues. We have religious issues. Everywhere I look, I see issues. Recently I have begun to wonder whether or not these individual issues can be pulled together to create a bigger picture. Is there something more going on around us, or are these just interesting times, as they say? It is hard to know where to start, and right now I frankly don't know where my musings and cogitations are going to take me. But I feel compelled to try to make sense of everything I see happening. In the interests of full disclosure I must tell you that I believe that there is a "grand plan", that events aren't happening as a series of cosmic accidents. Rather, it is God who "works out everything in conformity with the purpose of his
will" (Eph 1:11 NIV). So for me the real question is whether these days are close to the time when he starts wrapping it all up. Let's see what I come up with.

In light of recent events I think I'd like to start with the economy. That is a pretty big topic, so it will take a few paragraphs to get through it. If I start to bore you with details that you're already comfortable with, then please feel free to skip ahead. As we all know, the economy is in the midst of a recession. What isn't talked about to broadly here in the US is that this recession is being felt around the world. Global trade has been hit hard. Banks around the world are failing and those who are still in business are not eagerly lending money right now. So business, in a global sense, is have a really tough time. Adding to the mix, central banks are pretty much
all spending money like drunken sailors. And given the fact that there is not a single nation anywhere which has a currency tied to a hard commodity (such as gold or silver), we are looking at a global situation that has no historical parallel. The entire world is ripe for a cataclysmic financial disaster where confidence in paper money is lost universally, causing widespread disruption of trade and commerce. I don't think many Americans think about this very much, but the fact is that most of us, a huge majority of us, live far from the land, so to speak. I'm not so much thinking about distance in miles traveled as I am thinking distance in economic terms. Do you know how dependent you are on global and local commerce to make sure that there is bread and milk and eggs and vegetables at your local supermarket? Next time you're in the produce section take a close look at the labels on the goods. Lots and lots of fresh food comes to us from far, far away. Think about the consequences of global economic disruption on an historic scale.

Moving on, I'd like to explore a little more deeply the impact of current US economic policies on our currency, world trade and our way of life. The US government is spending money at a staggering rate. It is spending money that it has not collected in taxes. How is this possible? Well, they borrow it. The most obvious question to ask, then, is "Who has that kind of money?" Because we are talking about trillions of dollars, with a T. I'm about to explain, in simplistic terms, how the US government gets the money that they then go out and spend. You might recall hearing on the news about something called a Treasury Auction. That is something held on a regular basis where the US Treasury sells bonds, of varying lengths of maturity, to whoever wishes to buy them. Some times there is a high demand for these bonds, some times there isn't such a high demand. When the demand is high, the bonds will sell for a higher price, following the law of supply and demand quite faithfully. When the demand is low, the bond price goes lower in order to elicit enough demand to get all the bonds sold. The interest rate that the bonds pay is inversely related to price. So higher bond prices (caused by higher demand for those
bonds) bring about lower interest rates and vice versa. In order to make up the gap between the money the US government takes in through taxes and the money the US government spends on various programs the US Treasury sells bonds. This gap is what is called the deficit. In the current fiscal year the deficit will likely come out to be close to $2 trillion dollars (if not more, as some believe). That is more than 3 times greater than any previous deficit in US history.

So how on earth will the US government be able to sell that many bonds? In all likelihood they won't be able to, at least not to anyone else. But I'll get to that later. First of all I want to talk about foreign reserves, balance of trade and the world's reserve currency. Maybe you've heard that the US dollar is the world's reserve currency. What does that mean? Simply, it means that international trade is settled in terms of US dollars. When a farmer in Argentina sells a boatload of wheat to China, someone in China deposits US dollars into the farmer's Argentinean bank account. In the simplest of terms that is what it means to be the world's reserve currency. So for the last several decades it has been advantageous for foreign countries to hold some US dollars, because this made it possible for them to conduct international trade more easily. The US dollars that are held by these countries are what is referred to as foreign reserves. Some
countries have lots of foreign reserves (Japan, China, the Arab oil countries). These reserves have built up over time because they have enjoyed a positive balance of trade with the US. In other words, we bought more from them than they bought from us. So they ended up with
excess dollars. Their problem then becomes one of where to put those dollars? Along comes the US Treasury with such a deal!

For the last several years these countries with excess foreign reserves (excess over what they need to support their level of international trade) have showed up at the US Treasury Auction to buy some good ol' US Treasury bonds. Why not? The US is a stable country, they pay their debts, essentially it has been considered to be an investment of zero risk. Well, not so much anymore. Lately two things have been happening. These foreign buyers of US debt have been buying less and they have been buying more on the short end of the maturity curve. Let's look at the maturity issue first. What is the long term consequence to the US if more and more of it's outstanding debt is of short maturity? Well, when the bond matures in 1 or 2 years it is usually rolled over into another bond. When this happens the new bond may carry a different interest rate, which might be higher or it might be lower. In case you haven't been paying attention to these things, the current interest rates for US government debt are about as low as they have ever been in history. They are about as close to zero as they will ever come. So which direction do you think is the most likely one for those rates to go in the future? If you said, "higher", then pat yourself on the back. You've obviously been paying attention. So this interest rate risk presents a future problem for the US. If rates rise, which will likely happen because of poor economic conditions, this will be a double whammy that will only serve to make the bad situation even worse.

But the other thing that is happening right now is that the foreign countries with money to spend are actually spending less at the US Treasury Auction. There are a couple of reasons for this, but the reasons are less important than the consequence that results. Let me just touch on the reasons. First of all, because of the current global economic slowdown, these foreign countries have fewer US dollars to spend at the auction. They already hold billions of dollars of US bonds, but their current income of US dollars has dropped because of the global recession, so obviously they are spending less at the auction. The second cause is more troubling. These countries are now beginning to wonder if it is such a good thing for them to be buying US debt. They are wondering if it really is such a zero-risk investment. In fact, some of these countries are beginning to divert some of their excess US dollars into a stockpile of hard commodities, such as copper or iron or gold. This is really happening, right now. I believe that the trend will increase, rather than decrease or stay the same. It doesn't work out well for the US.

It is time for a recap. The US is spending more money than it has. It is borrowing the excess from foreign countries who have extra dollars to lend back to us. The amount of money that the US needs to borrow in the future is huge, compared to what we've borrowed in the past. The amount of money that foreign countries have to loan us (or are willing to loan us) appears to be decreasing, rather than increasing. This is not good.