01 U.S. National Debt Exceeds $31.36 Trillion

1) U.S. National Debt Reaches the Debt Ceiling Again

It is common knowledge that the U.S. national debt is towering, but at this stage, the scale of U.S. debt has reached a level that poses a risk of a debt crisis! According to the latest data from the United States, the federal debt has exceeded $31.36 trillion. It is important to note that the statutory debt ceiling of the United States is $31.4 trillion. Approaching the debt ceiling is a dangerous signal!

Many people may not have a clear understanding of a $31.36 trillion debt. Let's do some calculations for everyone. The U.S. GDP in 2021 was $23 trillion, which is significantly higher than the U.S. gross domestic product in 2021!

If we calculate based on the average, with a population of 332 million in the United States, the per capita debt is $94,400, equivalent to 660,000 yuan in Chinese currency. This is just the national debt. In fact, each American also bears personal debt, so this number is very large!

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2) U.S. National Debt Faces the Risk of Debt Default

What problems can high debt trigger? It is the issue of debt default and credit!

In this regard, U.S. Treasury Secretary Yellen warned that this would be disastrous for the U.S. economy. The U.S. national debt may face collapse and there is a potential risk of default.Once a default or collapse occurs, it is actually a risk for all countries around the world that hold U.S. Treasury bonds. So, here comes the question, many people might wonder: The United States is the world's leading economic power, why does it still owe so much national debt?

02 Why does the United States owe so much national debt?

1) The U.S. dollar hegemony harvests the world

The United States is a country that relies on borrowing and consumption, and because it is the leading power, the U.S. dollar has become the world's payment and reserve currency, which means the dollar can maintain its strength globally, also known as the U.S. dollar hegemony, giving it the capital to borrow money everywhere!

Under the U.S. dollar hegemony, the United States can adjust its monetary policy to harvest the world, which has been particularly prominent in the past three years during the pandemic!

At the beginning of the pandemic outbreak, the United States, in order to stimulate the economy, both flooded the market with money and distributed cash. According to statistics, from the end of February 2020 to the end of March 2022, the total assets of the Federal Reserve expanded rapidly from $4.21 trillion to nearly $9 trillion, with a cumulative growth of more than 100% in just two years!

In conjunction with the Federal Reserve's "massive money printing," fiscal policy also provided a "massive stimulus," with Biden pushing a $1.9 trillion stimulus plan, distributing an additional $1,400 to each person.

We know that money printing can drive up high inflation, but the United States is not at all worried and is willing to pay the price of high inflation to stimulate the economy. Why is that? It is because, under the U.S. dollar hegemony, inflation can be exported to other countries. Therefore, we see that the whole world is in a state of inflation, especially Europe and some emerging economies!

At the same time, interest rate cuts will also lower U.S. Treasury bond yields, directly diluting the debt held by other countries. Therefore, the United States can recklessly issue debt!In just 2 years, the United States has seen an astonishing increase of 8 trillion in national debt!

2) The collective effort of successive U.S. administrations

Many people continue to wonder how the national debt has reached a staggering 31 trillion. In fact, this is the result of the collective efforts of successive U.S. administrations!

Firstly, the United States is a democratic country where each election cycle involves a frantic spending spree to secure votes, leading to an ever-increasing national debt. Speaking of this year's midterm elections, a record-breaking $16.7 billion was spent, making it the most expensive midterm election in U.S. history!

In addition to this, the United States has high fiscal expenditures, which lead to fiscal deficits. How are these deficits covered? Of course, by issuing national debt!

Fiscal expenditures are primarily spent on two major areas: social welfare and defense spending. Social welfare expenditures include pensions, healthcare, and education. In 2021, the United States agreed on a budget of $3.5 trillion, focusing on family and social welfare expenditures.

Regarding military spending, it is known that when George W. Bush took office, the U.S. national debt was $5.6 trillion. During his 8-year term, he initiated two wars in Afghanistan and Iraq, and by the time he left office, the U.S. national debt had reached $10 trillion.

During Obama's 8 years in office, his healthcare reform almost doubled the U.S. national debt!

Since Trump's tenure, with economic stimulus, military spending, and the initial distribution of funds during the pandemic, the U.S. national debt has surpassed the $27 trillion mark!

It can be said that the United States is borrowing money to provide welfare for its people and to support its military forces.What to Do If the US Defaults on Its Debt?

Given the high level of debt in the United States, many people are concerned about what would happen if the US defaults on its debt or refuses to pay. After all, we are the second-largest creditor of US national debt!

1) Let's take a look at the current proportion of US Treasury bonds held by foreign countries.

According to publicly available data from the United States:

Japan reduced its holdings of US Treasury bonds by $23 billion in December 2021 to $1.304 trillion, remaining the largest creditor of the United States;

China reduced its holdings of US Treasury bonds by $12.2 billion in December 2021 to $1.0687 trillion, remaining the second-largest creditor of the United States;

Followed by countries such as the United Kingdom, Ireland, and Luxembourg, among others.

Many people might wonder why China holds so many US Treasury bonds.

The first point is that the US dollar is the international settlement currency, and we need to be able to handle payments at any time. Investing in US Treasury bonds is the best channel for this purpose.

The second point is that US Treasury bonds have the best liquidity, high returns, and the most developed financial markets. Purchasing US Treasury bonds can help preserve and increase the value of our investments.However, in recent years, everything is in flux!

2) Is the United States, facing increased debt repayment pressure, considering defaulting on its debts?

Due to the United States' significant borrowing, the rise in interest rates across all maturities of government bonds will further increase the pressure of interest payments on debt.

According to estimates by the Congressional Budget Office, from 2022 to 2031, interest expenditures will account for 1.6% of the U.S. GDP, and from 2032 to 2041, this figure will reach 4%. The burden of interest will encroach on other federal fiscal expenditure items.

As the scale of debt climbs and interest rates rise, the future increase in interest will exceed the growth of tax revenue. Therefore, the United States is actually considering not repaying its debts and interest.

After the outbreak of the pandemic, a voice has been loudly advocating that the United States believes China should be held responsible for the pandemic, and the U.S. can refuse to repay its debts to China.

Is this possible? Obviously, it is impossible.

We know that U.S. Treasury bonds are based on U.S. credit. If the United States defaults, it would severely damage U.S. credit, and other countries would no longer purchase U.S. Treasury bonds. Could the U.S. dollar still maintain its position as the world's currency? Could the U.S. dollar hegemony still stand?

Setting aside the possibility of defaulting, reaching an agreement on the debt ceiling is difficult. U.S. Treasury Secretary Yellen has warned that this would be disastrous for the U.S. economy, with U.S. Treasury bonds potentially facing collapse and the existence of potential default risks. Just look at how frightening this is!

From our perspective, we can also take countermeasures!In 2004, a global wave of U.S. debt selling began.

A series of operations by the United States in recent years have actually been undermining the dollar system!

Borrowing is a moment of pleasure, but the pressure to repay is great!

On the one hand, the scale of U.S. fiscal spending continues to expand, and the debt scale rises with the tide. On the other hand, this year, the Federal Reserve has continuously raised interest rates in large amounts to control inflation, which puts a lot of pressure on U.S. debt. This means that the interest on debt repayment has increased. Under a series of operations by the United States, the world has started a wave of selling U.S. debt!

Because when global buyers believe that the United States cannot pay its debt bills on time, the dollar will inevitably depreciate, and the credit of the dollar will also decline.

You think you can do whatever you want if you don't want to repay the debt. If you don't want to, then we will sell. As we said earlier, last year, Japan and we were selling, and the core reason was the continuous decline in the credit of U.S. debt!

Especially this year, the selling wave has been ongoing. Japan, France, Germany, Italy, and many other traditional allies of the United States have been continuously selling U.S. Treasury bonds in large amounts. The scale of U.S. Treasury bonds held by foreign investors has dropped to the lowest level in nearly 16 months.

Among them, Japan has always been the largest overseas holder of U.S. Treasury bonds, but it has also chosen to reduce its holdings for the third consecutive month, and the scale of holdings has reached a new low in three years.

Let's take a look at us. Data as of this year in September shows that China has kept its holdings of U.S. debt below one trillion dollars for five consecutive months, with holdings falling to 933.6 billion U.S. dollars, the lowest level since 2010. In nine years, it has accumulated a net sale of U.S. Treasury bonds with a scale as high as 383.1 billion U.S. dollars, and the accumulated net sale ratio is close to 30%.

So, everyone can see, the United States cannot do whatever it wants, even with dollar hegemony, it cannot do whatever it wants!The long-term status of the US dollar is inevitably under threat

In fact, as we discussed in our previous articles about the collapsing petrodollar hegemony, over the years, the dollar's dominance has been under pressure, with a global trend towards de-dollarization!

On one hand, the United States' influence in the Middle East is declining. The world's largest oil-producing country, Saudi Arabia, has expressed a desire to join BRICS this year, which is a challenge to the petrodollar hegemony.

On the other hand, during the Russia-Ukraine war, the freezing of Russian assets and even other countries' attempts to seize Russian assets abroad have made many nations realize that the security of their assets must be held in their own hands!

Russia has retaliated using natural gas, India has followed Russia's lead by moving away from the dollar and using its own currency, the rupee, for settlements, and China is accelerating the internationalization of the yuan. These are all countermeasures against the dollar's hegemony!

From this perspective, the long-term status of the US dollar is inevitably under threat!

Whether the dollar can continue to maintain its primary reserve status in the future depends on the hands of the world's major buyers of US debt. With large-scale sales, the dollar's reserve status has, in fact, already lost its label of trust!

Therefore, the United States must now address its debt issues!

06 The Federal Reserve concedes, and the yuan is expected to continue to rise

Under the pressure of global sales of US debt, the Federal Reserve has now issued a dovish concession signal, slowing down the upcoming interest rate hikes!Due to the interest rate hikes prior to this, for the global economy, it has been a form of harvesting. What we have seen the most this year is the collapse of various currencies, with the Japanese yen and the British pound depreciating significantly. The yen has depreciated by as much as 30%, the pound by over 20%, and the Chinese yuan has also broken through 7.37, with depreciation once exceeding 15%. It can be said that the US dollar is dominating global currencies!

Moreover, interest rate hikes have also significantly increased debt repayment pressures. Taking the six interest rate hikes that have occurred this year as an example, the additional interest costs amount to about 1.5 trillion US dollars.

At this stage, the Federal Reserve is already changing its interest rate hike path, the US dollar index has fallen, and the Chinese yuan has recently shown a continuous strong rebound, breaking through the 7 integer. Chinese assets have also surged across the board!

Next, as the Federal Reserve slows down the pace of interest rate hikes, and the expectation of interest rate cuts next year increases, the impact on the global economy will also be improved.

Furthermore, with the recovery of our economy, it is expected that the Chinese yuan may continue to rise! Additionally, the internationalization of the Chinese yuan will continue to be promoted!

Is there a feeling of spring warmth and blossoms ahead?