According to updated data from the US Treasury Department, the US federal government debt reached $31.36 trillion on December 1, which significantly exceeded the US last year’s GDP of about $25 trillion, further approaching the statutory debt ceiling of $31.4 trillion, prompting the Treasury Department to take extraordinary steps to avert a default.
The US Congress first introduced the debt ceiling in 1917, which means a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury. This measure means the government no longer needs congressional approval for every debt issuance. In the past 70 years, the debt ceiling has been raised 78 times, including in 2011, when the United States failed to reach a timely agreement on a new ceiling, leading to S&P’s downgrade of the US sovereign credit rating and an increase in borrowing costs. The government ran up against its $31.4 trillion debt limit in January, but the Treasury took extraordinary measures to allow it to continue funding government activities. The next key deadline is the upcoming June 1, when Congress must raise the ceiling again or risk the U.S. government starting to run out of money and default on its obligations. There is a fierce stand-off going on between Democrats and Republicans. Republicans want the White House to agree to across-the-board cuts in public spending and other reforms. Top Republican leaders met with US President Joe Biden at the White House last Tuesday (May 9) to try to resolve the dispute, but the talks produced no major breakthrough.
Behind the rising U.S. government debt is strong demand for and active ownership of Treasuries. Regardless of the legal debt ceiling, can the US government really borrow indefinitely from a purely economic perspective? According to the law of economics, unlimited borrowing does not work, because raising the debt ceiling is highly dependent on the government’s credit and the ability of interest payment. Unlimited debt requires unlimited capacity as collateral, but as we know, capacity is always limited, including in the United States. So to borrow indefinitely, the United States would have to cripple the dollar’s potential competitors, the euro and the yuan. So even if the dollar sucks, there’s no choice. In the worst-case scenario, the Federal Reserve could simply buy Treasuries without any country buying them. If the federal government can’t pay the interest, it can issue new debt to do so. If no one’s going to buy the new debt, but still, the Fed can buy it. There is no constitutional bar for the Fed to go directly to the stock market. This is the fundamental strength of the United States, which excessively enjoys the excessive benefits brought by coinage. From the establishment of the Brunton Woods System after World War II, making the dollar the international currency, to the disintegration of the Brunton Woods System, linking the dollar to oil, the dollar has been firmly occupying the dominant position in global trade transactions. Unless one day the world’s central banks no longer use the dollar as the main reserve currency and most international trade is not settled in dollars, the United States will not be able to issue Treasury bonds, then the United States will be reduced to a second-rate country, the current United States, is a country living on debt, endorsement is strong military strength and political influence.
The United States continues to increase its debt scale. In order to realize debt and risk allocation, the debt must be purchased by countries and investors from all over the world, or it can only be purchased by domestic investors. Therefore, the world’s recognition of the United States debt is crucial. As it stands, the world’s belief in and desire to continue to buy US Treasuries are greatly reduced. 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 dollars. 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 decline is almost in step with foreign holdings of Treasuries. A delegation of US Treasury officials had planned to visit China in February this year to prepare for a subsequent visit by US Treasury Secretary Janet Yellen, but was put on hold because of the “balloon”. However, US Treasury Secretary Janet 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.
For decades, banks, companies, and households around the world have sought the safety, liquidity, and convenience of US government debt, and more so since this century, which has continually raised the ceiling on US government borrowing. These trends may give the impression that the US government can borrow indefinitely, but in fact, from an economic perspective, the debt ceiling does exist, and turning a blind eye to it will affect the sustainability and riskiness of US government debt.
