Did the U.S. debt crisis really end after Biden signed the debt ceiling agreement? Things are far from that simple!
A week ago, the topic we were discussing was whether the $31.4 trillion debt ceiling issue could be resolved. At the last minute, U.S. President Biden signed an agreement that postponed the deadline for U.S. debt from early June of this year to the beginning of 2025.
Has the U.S. debt crisis ended? The impact is still ongoing.
The bill suspended the $31.4 trillion debt ceiling, which means the U.S. Treasury can continue to issue U.S. Treasury bonds to finance the huge expenses needed for the operation of the U.S. government, social welfare, and military spending.
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However, can the U.S. government really get this money smoothly? Things are not that simple.
Is the U.S. debt crisis lifted? The financing risk is huge!
The moment the U.S. debt ceiling bill was signed, the U.S. Treasury could continue to issue U.S. Treasury bonds and raise funds from domestic and global investors, including China.
But how much does the U.S. government plan to raise? The preliminary estimated financing scale is as high as $1.3 trillion! This number is very huge even for an economy like the United States!
The U.S. Treasury plans to raise $1.3 trillion.
Many people are puzzled, why does the United States need to raise so much? Because in order to avoid a default on U.S. Treasury bonds, the U.S. Treasury has actually taken "unconventional" measures to deal with the debt crisis.In January of this year, the United States actually reached the debt crisis ceiling. At that time, the two major political parties in the United States were busy with internal strife and had no time to pay attention to the warnings of Treasury Secretary Yellen.
As a result, Yellen had no choice but to resort to unconventional means, such as suspending bond issuance and suspending investment in government employees' pensions, to overdraw and avoid government debt default.
Yellen has repeatedly warned of the outbreak and danger of the U.S. debt crisis.
However, these overdrawn accounts need to be repaid, and in addition, the Treasury Department needs to increase its general account, also known as the TGA account balance, to a safe level of more than $600 billion. Therefore, a financing issuance plan of up to $1.3 trillion was formulated, of which the issuance of national debt alone exceeded $850 billion.
We often hear that the United States issues national debt as if it were printing paper, and dollars appear out of thin air with just a click of the mouse, which is very simple. However, in practice, if $1.3 trillion is raised from the market in a short period of time, it will also affect the fluctuations in the U.S. financial market.
Some Wall Street analysts even believe that the U.S. debt crisis has not ended, and this is the aftermath of the U.S. debt crisis. Although the financing plan has not been determined, the capital market has already begun to worry.
First, the continuous rise in U.S. Treasury bond interest rates is bearish for the financial market.
Because as the supply increases, the yield on U.S. Treasury bonds will inevitably fall, so we can see that the U.S. 2-year Treasury bond has risen by 0.8% in just a month, and it has been on an upward trend in recent trading days.
The yield on U.S. Treasury bonds has recently climbed significantly.
The rise in U.S. Treasury bond yields actually means the devaluation of paper assets, so this is an unfavorable performance in the capital market.Second, the U.S. banking crisis may make a comeback.
We understand that the reason for the U.S. banking crisis and the bankruptcy of multiple banks in the United States is due to the insufficiency of bank liquidity. Depositors, out of consideration for the safety of their assets, withdraw their funds from banks, leading to bank runs and subsequent bankruptcy.
The $1.3 trillion treasury financing plan this time may also lead to the outflow of commercial deposits, triggering the U.S. banking crisis to ferment again, especially small banks with relatively small scales, which will be more susceptible to runs.
Due to severe bloodsucking, will the U.S. banking crisis continue to ferment?
Third, money market funds are also not safe, and the United States is forced to raise the return on funds.
Some people have come up with a solution, that is, to raise funds through money market funds with a scale of more than 5 trillion. However, looking at the difference between the current U.S. Treasury yield and the return on money market funds, the U.S. government must borrow money from the American people at an investment return rate of 6%, which is very high.
It should be noted that before the interest rate hike, the return rate of the U.S. government's debt borrowing was only 0.1%! That is to say, the Federal Reserve's interest rate hike has raised the interest rate level, forcing the U.S. Treasury to spend dozens of times the previous cost of borrowing. The U.S. government may have no choice but to borrow.
The above three points have led to tremendous pressure on the U.S. financial system. This pressure will further be transmitted to the economy, causing the already embarrassing U.S. economy to further decline.
Because theoretically speaking, the withdrawal of $1.3 trillion is equivalent to the effect of a 25 basis point interest rate hike in the United States. Both interest rate hikes and withdrawals will essentially reduce the liquidity of dollars in the market, thereby affecting the development of the real economy.
What is the predicted GDP growth rate for the U.S. economy in 2023? It is about 1.6%, and the GDP expectation for 2024 is even lower, only about 1%.The OECD forecasts that the US GDP growth rate will be 1.6% in 2023, while China's will be 5.4%. Therefore, the US Treasury can certainly continue to develop, incur more debt, and print dollars to meet the substantial expenditure demands of the American people, as well as to counter China's military spending.
However, even with the dollar hegemony and seigniorage rights, the US Treasury and the Federal Reserve are somewhat overwhelmed in the short term in dealing with such a massive "printing demand."
The US debt crisis exposes the flaws in the US fiscal system. From the aforementioned events, it is evident that this US debt crisis has undoubtedly exposed the shortcomings of the US financial system.
Firstly, partisan infighting has led to the US debt crisis being resolved only at the last minute, and after 2025, the two major parties in the US will again engage in internal strife. We, as global investors, are also forced to watch this American drama unfold, hoping that the financial nuclear bomb of the US debt crisis does not explode.
Secondly, investors' confidence in US Treasury bonds is gradually diminishing. Although US Treasury bonds remain the most risk-free investment assets globally, the uncertainty brought about by the debt ceiling issue is growing. The call for de-dollarization worldwide is also getting louder.
Countries including Saudi Arabia, Argentina, Brazil, Russia, and China have entered into local currency swap agreements and direct settlement in local currencies because they feel that dollar hegemony restricts national sovereignty and financial security. That is why they are fostering a good relationship with the Chinese yuan.
In summary, from any perspective, the US debt crisis is far from over. The US still faces severe fiscal and economic challenges. The agreement signed by Biden only temporarily alleviates the inherent crisis of the US economy and does not fundamentally solve the problem.In addition, the United States' fiscal issues have long been structurally imbalanced, with the dollar hegemony being questioned and the call for de-dollarization growing louder, leading to a decline in investor confidence. All of these factors bring intense turmoil to the U.S. debt market and could even trigger a systemic financial crisis.
U.S. President Joe Biden officially signed the debt ceiling bill at the White House.
For China, the dollar hegemony is akin to a bomb that will inevitably explode one day. Therefore, we should continue to promote the internationalization of the renminbi, and the central bank needs to keep purchasing gold to prevent us from suffering the same fate as Russia, which saw its dollar assets frozen.
Recently, the term "extreme thinking" has been mentioned at the highest levels. It emphasizes the importance of maintaining a bottom-line mindset and extreme thinking, preparing to withstand major tests that are as challenging as high winds and rough waves, or even more severe.
The U.S. debt crisis is, in fact, a significant test for China and the global community. If the U.S. manages to get through this crisis smoothly, what about the next one? And the one after that? Perhaps all readers of this article will inevitably experience a U.S. debt crisis explosion within their lifetimes.
China needs to maintain a "bottom-line mindset" and pay attention to financial security.
Thus, do not underestimate the U.S. debt crisis. Do not belittle it just because the two parties in the U.S. are playing politics with the debt ceiling. In fact, in recent years, we have already witnessed history multiple times. In today's context of escalating Sino-American tensions, it is very necessary for each of us, or each family, to maintain a bottom-line mindset to ensure the safety of our lives and financial well-being.