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When, If the US Bond Market Tipping Point Would Crash the Dollar?
When Clinton left office the US deficit was around $4 trillion. At the end of Bush’s term it had reached around $11 trillion. It then ballooned under Obama to around $20 trillion. As Biden takes over for Trump the deficit is approaching $28 trillion. With the acceleration of the deficit going unchecked, the question is what will be the tipping point where markets say “enough is enough.”
So far there seems to be little concern expressed about the limits of US deficit spending. Even with another $1.9 trillion, which has become a political football, about to be added to the deficit, it would be rare to hear any elected official ask, “What is the tipping point where there is a limit to how much the US can borrow.”.
Why is this important?
Up until now, markets have had a free lunch with US fiscal policy combined with Fed printing money to finance the deficit providing massive liquidity that has found its way into stocks, bonds, and more recently into commodities. This is where there has been inflation while the Fed focuses on its own measures of price increases, which according to its criteria remain subdued. Whether this turns out to be asset bubbles of historic proportions remains to be seen, Much depends on whether bond markets behave or reach the tipping point where they say “no mas.”
What would tip the bond market and crash the dollar?
The trigger would not come from the domestic side but from foreign demand for US treasuries. This scenario would likely lead to a plunge in the US currency and a potential dollar crisis as foreigners demand a higher yield and/or abandon the market altogether. I am not saying this will lead to an Argentine-style financial crisis but the recent rise in US bond yields is a warning shot.
If I dug deep in my gut I would say it is a matter of when, not if the US spending spree will reach a tipping point but it is not something I would be willing to trade on in the short run. However, it is something to keep in mind as complacency is a dangerous word when it comes to trading.
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