Fiscal cliff and foreign bondholders

"You Americans love the dramatics of a cliff." This could be a comment from any international investor, yet there has been little consideration of foreign investors on the US debt problem.

1. Raising the rate on high earners will not raise significant revenues. The expectation is that the rate will increase revenues by $800 billion over 10 years with closing deductions raising another $800 billion over ten years. This will be $1.6 trillion over ten years. Some have already stated that a compromise will have this number be more like $1.4 trillion which is just over the annual deficit for one  year.

2. Revenue will not increase without growth and there is no growth strategy.

3. Additional spending will increase by $50 billion which is close to 75% of the increase in taxes.

4. 45% of the tradeable debt is held by foreigners. They will control the fate of the rates in the US. The Fed cannot buy all of the new debt even with a program of $85 billion per month broken between $45 billion in Treasuries and $40 billion in mortgage debt. Japan is only in debt to other Japanese while the US is in debt to other parts of the world. 

5. Total debt is $16 trillion so a 1% increase in interest rates will add over time $160 billion per year in transfer payments form taxpayers to debt holders.  

6. Sovereign debt is no long risk-free debt, so the assumption that US debt being safe is wrong. The demand for US debt may change.

7. The debt ceiling debate is not part of the fiscal cliff at this point.  

8. The dollar is important to any discussion of debt because foreigners hold Treasuries in dollars. The desire to push the dollar lower will hurt the Treasury debt holder. 

9. The rate and float of all Treasuries will be determined by Fed buying. Th float of long-term Treasuries with maturities more than 10 years is only $750 billion. 

10. Financial repression is controlling the demand for Treasury debt. The financial repression may not work with foreigners.  

11. Foreign bondholders do not like negative real rates. The safety of a rising dollar will not solve the negative rate problem forever.