According to the updated data of the US Treasury Department, the US federal government debt reached $31.36 trillion on December 1 this year. This is far more than last year’s US GDP of about $25 trillion, and is further approaching the debt ceiling of $31.4 trillion. The US Treasury Department has taken extraordinary measures to prevent the federal government from defaulting on its debt.
During the pandemic, the US government implemented fiscal incentive policy, including increasing money supply and issuing more Treasury bonds, to ease the impact of the pandemic on the US economy, which also led to a sharp increase in the total amount of US treasury bonds. The Treasury bonds has soared by $7 trillion since the end of 2019. The Fed shifted into anti-inflation mode to prepare for the first interest rate increase since 2015. With high inflation and increasing interest rate, the risk of on-off issuance of the US Treasury bonds has grown. So far, the Treasury has been unable to issue more debt because it has hit the debt ceiling. The US Treasury is not worried about hitting the debt ceiling. Congress has changed the debt ceiling 99 times since the end of the World War II and it is only a matter of time before both houses of Congress raise the debt ceiling. From the perspective of economic principle, every country issuing local currency bonds does not need to repay the principal in theory, but only needs to borrow new bonds to repay the old. As long as the national fiscal revenue can bear the interest expenditure of Treasury bonds, the repayment can be stable. For the United States, the dollar is the world currency, and global investors’ strong market demand and active support for the US Treasury bonds enable the United States to repay the interest by borrowing the new debt. Even if it is unable to repay the interest one day, the United States can also print money to repay the debt and spread its debt evenly to other countries in the world, and this is why the United States can ignore the debt ceiling and continue to borrow wildly. But every upside has a downside.
The United States continues to increase its debt scale. Debt and risk dispersal can only be realized if countries and investors in the world buy their Treasury bonds, otherwise it will be bought by domestic investors. Therefore, the world’s recognition of US bonds is crucial. As it stands, the world’s belief in and desire to continue to buy US Treasuries are considerably reducing. In the past year, China and Japan, the traditional big holders of US Treasuries, reduced their holdings of US Treasuries by an unprecedented total of $397.7 billion. Japan reduced its holdings by $224.5 billion, while China reduced its holdings by $173.2 billion. Today, China’s total holdings of US Treasuries have fallen to $867.1 billion, and its share of China’s foreign exchange reserves has fallen to 27% from a historic peak of more than 50%. Such a decrease is almost in step with the decline of the proportion of the foreign investors’ holdings. The delegation of US Treasury officials had planned to visit China in February this year to prepare for a subsequent visit by US Treasury Secretary Yellen, but was put on hold because of the “stray balloon”. However, US Treasury Secretary Yellen said she still hoped to visit China and meet with her counterparts in the economic field. The US Treasury Department is so eager to visit China, which is a Greek gift. It just hopes that China buy US Treasuries and rely on China to help the US solve its debt problem. It is unlikely that China will buy more US Treasuries. China has always adopted a diversified investment approach rather than putting all eggs in one basket, and the US debt problem cannot be solved by one or two countries.
The dilemma facing the US today is that it has no constructive power over the global economy, but destructive power. It can only make the global economy pay for the US debt by rebuilding the Capital Doubtful Recycling. If it fails to do so, it will collapse. In the long term, the United States lacks the ability to adjust itself proactively. It can’t adjust the abnormal pattern of financial-first at home, and its positive guiding power to the global economy is weakening. However, China has the ability of adjusting at home, controlling capital, constructing abroad, and developing emerging and undeveloped countries. Therefore, China has the long-term strategic initiative in China-US confrontation. As long as China rises further and world trade has alternatives to the dollar, there will be an external constraints on the dollar.
