The current US government’s $31.5 trillion debt level could result in the country not meeting its government obligations unless the cap is raised again. Treasury Secretary Janet Yellen vividly and figuratively described the consequences of the default. “Failure to meet government commitments will irreparably damage the U.S. economy, the livelihoods of all Americans, and global financial instability,” Yellen said.
For Yellen, I can only say that the Americans and the US economy matter. But what about the people of Japan whose government has invested $1.3 trillion in US national debt? Are the Chinese people second to none, purchasing nearly $900 billion in US Treasury bonds? Then come the British, Belgians, Luxembourgers (of course, these are offshore companies) and other countries that have lent money to the United States for the development of the American economy.
The US budget runs a stable deficit, which is covered by public debt. In recent years, factors such as military expenditures, the fight against the epidemic, the fate of the 2008 and 2020 crises have been effective in this. And the budget deficit is a direct way to increase public debt, which has now already exceeded 136.62% of US GDP. In absolute terms, this is the highest level of debt in the world. By the way, read this material, the debt will increase by several million more dollars.
What is public debt and who are its owners? The U.S. Bureau of Financial Services divides national debt into government debt and public debt. 75% of the public debt is made up of treasury bills issued on a short-term basis (up to 1 year maturity) – the so-called. Treasury bills. They are commonly used by the US Federal Reserve to regulate the amount of money supply, and by companies to deposit “cash balance” – free money that is not currently needed and can be deposited for a short period of time to generate income. This is followed by treasury bills – one to five-year liabilities, and treasury bills – long-term bonds with maturities of five to ten years or more. All of them are very popular not only in the USA, but also in the international capital market. The main reason for this is their reliability. In all times of crisis, even during the stock market crash and the Great Depression, the 1929-1933 US government always paid the bills.
In the theory of investment portfolio management and analysis of investment projects, the liabilities of the US government are called “risk-free assets” (risk-free assets) and the probability of default or credit risk is considered to be equal to zero. When investing in stocks, investment projects, buying real estate, etc. They are used to compare other investment options and evaluate the risk premium. Simply put, a risk-free asset is a “zero” reference point, a benchmark for calculating the risk premium an equity holder should receive if he or she invests in riskier assets and not them.
Since the United States has the largest economy in the world and its GDP is larger than any other country, the reliability of its debt obligations is absolute, i.e. practically no risk. In other words, as announced to all securities holders, they will in any case be able to reach an agreement with their Treasury bill holders. True, not everyone believed. For example, China sent an official delegation during the 2008 crisis to get assurances that $1.3 trillion would be returned. Guarantees were issued in Washington, but China still pulled more than $400 billion in bonds. The oil monarchies in the Persian Gulf are also getting rid of them.
However, governments and companies around the world need an asset to invest in to maintain and increase their reserves, the demand for such “risk-free assets” is stable. And if there is demand, then the Treasury can simply issue new loans and sell them, usually by auction.
But what is the ceiling of this debt? How many bonds can you issue before other investors begin to doubt their credit quality?
This cap does not allow the US government to spend additional, but only affects the ability to meet current needs by closing the “cash gaps” between federal budget spending and income (i.e. taxes).
However, failure to raise the debt ceiling may leave bondholders insecure about the federal government’s ability to pay and repay debt. And then, as “grandmother” (as merchants around the world call her), Yellen said, “It will do irreparable damage to the U.S. economy, to the livelihoods of all Americans, and to global financial instability.”
The risks of government bonds are very similar in nature to the risks of issuing unsecured fiat currency. After all, we also know them as a means of payment and settlement, a means of savings, until everyone accepts these cut pieces of paper as an asset with real value, such as gold or silver coins.
This is also the case with bonds – investors support the borrower’s (in this case the US government) trust loan and its ability to pay off its obligations on demand. But reliability is measured by a credit rating determined by the same three American rating agencies, Standard & Poor’s, Moody’s Investor Services and Fitch. It is the highest – AAA for government obligations of the USA, Great Britain and some other countries.
However, it was precisely the political games around the increase in the debt ceiling in 2011 that led the most authoritative agency, Standard & Poor’s, to downgrade the US government’s credit rating to AAA-, resulting in a financial shock. markets: the price of gold has risen to over $2,000 per tr. The ounce and dollar fell against other currencies.
The concept of the “ceiling” (Debt Cap) was created in 1917, by moving from the approval of a single issuance of government bonds, as before, to the approval of all groups of bonds at once, which simplifies the financing of military finance. Expenditures made during the First World War. The debt ceiling was first introduced by the US Congress in 1939 to give the Treasury the freedom to issue bonds. At the time, raising the ceiling allowed the government to borrow to close the gap between spending and tax revenues already approved by Congress.
This continued without incident until 1953, when the U.S. Senate tried to restrain President Dwight Eisenhower from requesting more borrowing to finance the construction of the nation’s highway system. The borrowing limit has been raised dozens of times since then, but over the past two decades it has become an instrument of political struggle. The most striking episode, as we mentioned earlier, was 2011, when the credit ratings of treasury bills were lowered. It also downgraded Republicans and Barack Obama, who were trying to lobby for the Affordable Care Act. Obama later agreed to cut spending by more than $2 trillion over 10 years.
Now the US administration has already exceeded its predetermined limit of 31.4 trillion, forcing the Treasury to resort to a so-called remedy. “extraordinary measures” – withholding regular contributions to the federal employee’s pension fund to use to repurchase bonds.
As soon as these measures are exhausted, more stringent measures could be implemented to pay the government debt, which, meanwhile, was already seriously discussed in 2011. These include delaying payments to civil servants, reducing their number, and stopping the payment of social security checks. If these measures are not taken, of course, unless the national debt limit is raised once again before the beginning of June, a default is inevitable.
As President Biden’s spokesperson said, “Failure to pay the debt will plunge the country into economic collapse and disaster and provide a historic boost to our competitors like China.”
Isn’t it true that this whole story looks like a financial pyramid or a financial bubble? But this is a sure sign of change in the world leader.
The author expresses his personal opinion, which may not coincide with the editors’ position.