Recently, the topic of U.S. debt has once again become a hot issue. On July 26th, the U.S. debt scale broke through the staggering threshold of $35 trillion, a figure that leaves one speechless. What does $35 trillion represent? Simply put, it is equivalent to the fiscal revenue of the U.S. federal government over eight years. However, don't celebrate too soon, as these eight years are far from enough to pay off the debt.
Why is that? Because not only did the U.S. government not have a surplus last year, but it also incurred a deficit of $2.3 trillion. This $2.3 trillion did not fall from the sky; it was filled by borrowing new debts.
The data speaks for itself: in 2022, the U.S. debt scale was $30.93 trillion, reaching $33.98 trillion by the end of 2023, and as of July 26th of this year, it has surpassed $35 trillion. At this rate of growth, it's not just about clearing the debt in eight years; it's likely that the U.S. debt scale will easily surpass $50 trillion.
Advertisement
Yellen once predicted that the U.S. debt scale would reach $51 trillion within 10 years. However, this prediction is too conservative. As early as June 2022, the U.S. debt scale had already broken through $32 trillion, nine years ahead of schedule.
So, regardless of whether Yellen's prediction is accurate or not, the trend of the continuous growth of the U.S. debt scale cannot be changed. The only difference lies in whether it increases more or less.
So, the question arises, will the U.S. debt not be honored? After all, with such a large scale and such a rapid growth rate, many people have started to worry. If it is not honored, wouldn't that mean the Americans are getting something for nothing?
Don't worry, let's first take a look at who actually holds the U.S. debt. Here's a bit of knowledge for everyone:
The first is the U.S. federal government, which holds about 20% of the U.S. debt. This is interesting, as they issue the debt, buy it themselves, and when it comes time to pay, isn't it just a matter of moving money from one hand to the other?
The second is the Federal Reserve, which holds nearly 20% of the U.S. debt. The Federal Reserve is the central bank of the United States, and although it is nominally independent, it is actually under the jurisdiction of the U.S. Congress. So, whether it's the Federal Reserve or the U.S. federal government holding U.S. debt, for us foreigners, it can be understood as the U.S. government holding its own issued national debt.
With this understanding, we can see that although the U.S. debt scale is enormous, nearly 40% of it is being managed by Americans themselves.The third major holder is overseas entities, which refers to us foreigners. For instance, China holds approximately $700 billion in U.S. debt, accounting for about 2% of the total U.S. debt. Globally, foreigners hold around 20% of U.S. debt. Among them, Japan holds the most, with over $1.1 trillion, ranking first; China follows with over $700 billion, ranking second; and the United Kingdom also holds over $700 billion, ranking third.
Calculating up to this point, you might wonder, if the U.S. government holds nearly 40% and foreigners hold over 20%, where does the remaining 30%-40% go? In fact, this portion is still within the United States, primarily held by other U.S. institutions and individuals.
So, at least 70% of U.S. debt is actually in the hands of Americans themselves. The U.S. federal government repays the principal and interest, and this money essentially circulates within American society. From this perspective, even if the U.S. debt is not honored, the most affected would still be the Americans themselves.
However, the issue of repayment risk is not unsolvable. For example, everyone has been discussing that the U.S. is about to start lowering interest rates. During a rate-cutting cycle, as long as the interest rates are lowered sufficiently, U.S. debt will not only not have to pay interest but may even repay less.
How does this work? Let's do some calculations to understand.
First, it's important to clarify that the interest rate level is not the number published by the Federal Reserve. The Federal Reserve publishes the nominal interest rate, for example, the current rate is 5%, but this does not mean that we can get a 5% return by depositing money in a bank.
Why? Because we also have to consider the factor of inflation. Therefore, the real interest rate level is the nominal interest rate minus the inflation rate. For example, if the Federal Reserve's published interest rate is 5% and inflation is 3%, then the actual interest rate level is only 2%.
So, during a rate-cutting cycle, as long as the nominal interest rate is lowered sufficiently, the real interest rate could become 0 or even negative. For instance, if the rate-cutting continues for a year or two, and when the Federal Reserve lowers the rate to 2% or lower, the real interest rate could become negative.
Consider this: when the actual return on U.S. debt is negative, what's the point of holding U.S. debt? Therefore, once the rate-cutting cycle begins, regardless of the actual scale of U.S. debt, a trend of selling U.S. debt will emerge.
So, who will take over these sold U.S. debts? It's simple; the U.S. federal government just needs to print some money, and it can take over. Thus, the holders of U.S. debt become the U.S. federal government or the Federal Reserve again. The federal government prints money and holds U.S. debt itself; isn't this just a case of moving money from one hand to the other?Assuming the United States really defaults on its debt, what would happen to Japan and China, the largest holders of U.S. Treasury bonds? Japan holds over 110 billion U.S. dollars, and China holds over 70 billion U.S. dollars. If this money were to go down the drain, it would indeed be quite painful.
However, consider this: what is the annual trade surplus that Japan and China have with the United States? Japan's trade surplus with the U.S. in 2022 was 68 billion U.S. dollars, and China's was 369 billion U.S. dollars. This means that even if the United States really reneges on its debt, as long as Japan and China continue to maintain a trade surplus with the U.S., they could recoup their losses in just a few years.
Moreover, do you think only the United States plays this trick? Other countries are not to be underestimated. Take Japan, for example; their national debt now exceeds 250% of GDP, far higher than the United States' level of around 130%. If Japan can play this game, why can't the United States?
Furthermore, as the world's largest economy and with the U.S. dollar being the primary global reserve currency, the U.S. has the confidence and strength to play this game. What can you do? Stop playing with them? But where would you put your foreign exchange reserves? You can't really keep them under your own bed, can you?
Speaking of which, some smart friends may have already realized that this is akin to a perpetual motion machine. The U.S. continuously issues new debt, other countries keep buying it, the U.S. uses this money to stimulate economic development, then other countries earn back this money through trade surpluses with the U.S., and then they buy U.S. Treasury bonds again... This cycle repeats, isn't it a win-win situation?
However, there is no such thing as a free lunch. This game, which seems to give the U.S. all the advantages, actually comes at a cost.
Firstly, to maintain the international status of the U.S. dollar, the U.S. has to keep its financial markets open to the outside world and allow relatively free capital flows. This means that the U.S. has, to some extent, lost complete control over its own economy.
Secondly, the ever-increasing debt puts long-term pressure on the U.S. economy. Although the U.S. can alleviate its debt burden by lowering interest rates, rates that are too low can encourage excessive borrowing, leading to asset bubbles and financial risks.
Furthermore, to keep this game going, the U.S. government has to continuously expand its fiscal deficit. This means the government either has to increase taxes or cut public spending, both of which can lead to social conflicts and political pressure.
Lastly, the status of the U.S. dollar as the world's main reserve currency is not set in stone. If other countries start to massively sell off U.S. Treasury bonds or look for alternatives to the dollar, the U.S. economy would face a serious shock.So, at its core, this game is an art of balance. The United States must find a balance between maintaining its own interests and preserving international credibility. If played well, the U.S. can continue to enjoy the benefits of the "seigniorage"; if played poorly, it may lose the privileged status of the dollar.
So, as ordinary citizens, how should we view this issue?
Firstly, we should maintain rationality and calmness. The continuous growth of U.S. debt is indeed worth paying attention to, but a large-scale default is unlikely to occur in the short term. The U.S. government and the Federal Reserve have sufficient tools to manage debt risks.
Secondly, diversify asset allocation. Don't put all your eggs in one basket. In addition to U.S. dollar assets, consider allocating some gold, other major currencies, or physical assets to diversify risks.
Furthermore, pay attention to global economic trends and geopolitical changes. These factors can all affect the international status of the dollar and the value of U.S. debt.
Lastly, improve your financial literacy and risk awareness. In this complex financial world, only by continuous learning can you better protect your wealth.
In general, the U.S. debt issue is a complex global economic problem with no simple answers. But as long as we keep a clear mind and view the issue rationally, there is no need for excessive panic. After all, in this interdependent global economic system, all countries are in the same boat. Instead of worrying about whether the boat will sink, it's better to think about how to make this boat sail more steadily and further.
Of course, if the United States really messes up one day, then there will be quite a spectacle. At that time, we spectators may not be as simple as just watching the show, but may have to jump in and swim together. However, until that day comes, let's continue to pay attention to the "white knights" of U.S. debt and see what new tricks they can come up with. After all, this is a grand play concerning the global economy, and its excitement is definitely no less than that of a Hollywood blockbuster!
Comments