The Deadly Dollar
When asked about the cause of bankruptcy, a character in Hemingway's novel "The Sun Also Rises" once said a famous quote: "It started with a gradual decline, and then it was a free fall."
Years later, when describing the U.S. national debt, we might also use this phrase.
The U.S. fiscal policy has firmly moved towards default - every delay in facing this prospect makes the default harder to avoid.
One trillion dollars - when the number breaks through an integer, it always stimulates people's nerves.
For the first time this year, the U.S. government spent more than one trillion dollars to pay interest on a total debt of 35.3 trillion dollars.
After deducting the interest earned by government investments, the net interest payment has reached 843 billion dollars, exceeding its defense expenditure.
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The proportion of government debt to GDP is an important indicator to measure the debt repayment ability of an economy.
For developed countries, the internationally recognized safety line is 60%.
The current U.S. national debt accounts for 123% of its 28.6 trillion dollar GDP - a level that has not been reached even during World War II.
The support ability of U.S. national debt to the U.S. dollar is not unlimited.
The U.S. "The Hill" published an article saying that the U.S. national debt is growing explosively at an unsustainable rate, and has become the biggest threat facing the United States.
"The U.S. bond market may only be one shock away from collapse."
Paradoxically, the faster the government debt is upgraded to an inevitable debt crisis, the less politicians and voters seem to care.
"The United States is rushing towards fiscal doomsday, but is unprepared for the social unrest that may be triggered."
Former Director of the White House Office of Management and Budget Mitch Daniels recently published a commentary article in The Washington Post titled "The Day of the 'Death of the Dollar' is Coming, How to Deal with It?"
The U.S. national debt, which is more than double the international warning line, will one day change from the "anchor of the dollar" to the "poison of the dollar".
Astonishing growth rate From September 2017 to January 2022, the scale of U.S. debt increased from 20 trillion dollars to 30 trillion dollars.
In June 2023, to alleviate the urgent need to default on U.S. government debt, the U.S. government debt ceiling was postponed to take effect at the beginning of 2025.
Since then, U.S. debt has started a "hundred days and a trillion" crazy mode - increasing by about one trillion dollars every 100 days: In June 2023, the federal government debt exceeded 32 trillion dollars, and the time to reach this number was 9 years earlier than predicted before the COVID-19 pandemic; In September 2023, the U.S. debt exceeded 33 trillion dollars; In December 2023, this number reached 34 trillion dollars, and it rushed through the 34 trillion dollar threshold 5 years earlier than the prediction made by the U.S. Congressional Budget Office.
According to the real-time updated data on the U.S. Treasury website, as of September 20th, the total debt of the U.S. federal government has reached 35.33 trillion dollars, which is the sum of the economic total of China, Germany, Japan, India, and the United Kingdom.
It is equivalent to each American being in debt of 104,800 dollars.
"In my career, I have never seen such a scale of debt."
Ray Dalio, founder of Bridgewater Fund, said.
It is expected that by the end of the 2024 fiscal year on September 30th, the U.S. fiscal deficit for the whole year will reach nearly 2 trillion dollars, an increase of 24% compared to the same period last year; the total interest paid will reach about 1.16 trillion dollars, second only to the expenditure on social security and medical insurance.
"Although the U.S. economy should be 'strong', we see such a huge level of expenditure and huge deficit.
Imagine what the deficit will be when the economy goes down."
Market analyst Mike Maharrey said.
Former U.S. Treasury economist Mark Sobel warned that the United States must solve its "huge deficit" in order to maintain the controllability of fiscal policy.
"If not solved, the rise in the ratio of U.S. national debt to GDP and the cost of debt repayment indicates that the U.S. domestic economy and international dominance are about to collapse."
The Hill warned.
U.S. Bank commodity strategist Michael Widmer said that market analysts generally believe that the collapse of U.S. debt is becoming an increasingly increasing "tail risk" - unlikely to happen, but once it happens, it will be a costly "extreme risk".
On September 18th, JPMorgan Chase said in a report: "Given the continuous rise in U.S. public debt levels and the continuous increase in fiscal deficits, the biggest challenge facing the U.S. dollar's dominant position is the United States itself."
The budget model of the Wharton School of the University of Pennsylvania shows that given the particularity of the United States - especially the low savings rate, it cannot maintain a debt ratio exceeding 200% of GDP under any circumstances.
At that time, the taxes needed to stabilize the debt will be very huge, which will drag down the economy.
The economist of the school said that 200% is the upper limit based on favorable assumptions.
"A more reasonable value is close to 175%, even so, it is based on the assumption that the financial market believes that the government will eventually implement effective debt reduction measures."
The key is that this maximum value is not the maximum debt amount that the United States can safely bear (the current debt has already exceeded the range that the United States can safely bear), but the critical point at which default changes from difficult to avoid to inevitable.
According to the prediction of the U.S. Congressional Budget Office, the proportion of U.S. national debt to GDP will reach 185% by the middle of this century.
"Now the interest payment of the national debt is higher than the entire defense budget, and it is still rising."
Elon Musk, CEO of Tesla Motors and SpaceX, warned that the country is "moving towards bankruptcy rapidly."
Historically, any power that has debt repayment costs exceeding defense spending will not remain strong for a long time.
"Habsburg Spain is like this, old France is like this, the Ottoman Empire is like this, the British Empire is like this.
From this year, the United States will be tested by this law."
Niall Ferguson, a history professor at Harvard University, said in a recent article.
The United States turns a blind eye to its fiscal prospects, which have become worrying economically, but have become politically unattended.
The Democratic presidential candidate and Vice President Kamala Harris, and the Republican presidential candidate and former President Donald Trump are unusually silent on the debt issue of the U.S. government.
This is not surprising.
The way to reduce the scale of U.S. debt is nothing more than to make the government spend less.
But this is not what voters want.
In order to win votes, both Harris and Trump have made expensive promises - both parties are opposed to cutting social security and medical insurance, which are the biggest drivers of debt; both hope to extend the trillions of dollars in tax cuts that will expire at the end of 2025, and both parties agree that federal income tax should not be increased for at least 97% of American families.
In just the past few months, Trump has promised to exempt tip taxes, cancel income tax on social security benefits, cancel taxes on overtime pay, reduce the tax rate for companies engaged in manufacturing in the United States, and set up new deductions for the costs of new parents, providing more than 2 trillion dollars in tax cuts on the basis of extending the 4 trillion dollar tax cuts of his first term.
Like Trump, Harris has also proposed to exempt tip taxes and called for the expansion of the child tax credit, including a 6,000 dollar credit for new parents.
"No matter who wins the U.S. presidential election in November, the fiscal situation of the United States in the next four years is likely to deteriorate further, and neither the Democratic Party nor the Republican Party has a feasible plan to solve this problem."
The British "The Economist" said.
"It really doesn't make any difference whether Trump or Harris wins.
The real problem is the 35 trillion dollar U.S. debt, that's the real problem.
Neither Trump nor Harris can solve it."
Dalio said, "I think as time goes on, the path of U.S. debt monetization will be more and more close to Japan."
No matter who wins the election in November, they will soon face two major fiscal tests: one is the need to raise the federal debt ceiling, which may be in the middle of 2025; the other is that most of the 2017 tax law is about to expire, if Congress does not take action before the end of 2025, most American families will increase taxes, and this deficit reduction path is not what both parties want to see.
The real risk The United States relies on the international benchmark currency status of the U.S. dollar, and the government's debt financing is not difficult, as long as it keeps raising the debt ceiling, it can continue to "borrow new debt to repay old debt".
According to statistics from the relevant departments of the U.S. Congress, since the end of World War II, Congress has adjusted the debt ceiling 103 times.
Since 2001 alone, the U.S. Congress has adjusted the debt ceiling more than 20 times.
"The problem is not that the absolute scale of U.S. national debt is threatening the U.S. financial system, but that inflation and the future value of the dollar are threatening the entire system.
So I am not worried about how much the absolute quantity of U.S. national debt supply is, but I am worried about the prospect of fiscal deficits."
At the 2024 annual shareholders' meeting of Berkshire Hathaway, when asked about the risk of U.S. debt, Buffett said so.
From Buffett's answer, three real risks brought by such a large scale of U.S. debt can be deconstructed.
The first is high inflation.
On the one hand, fiscal deficits themselves will bring inflation.
On the other hand, under the pressure of large-scale debt, the government will be willing to promote the occurrence of inflation, which can dilute the debt to a certain extent.
The second is high interest rates.
Excessive debt supply will lead to a decline in bond prices, and the interest rates that are inversely proportional to bond prices will rise.
Essentially, this is the risk premium that investors seek to worry about the debt problem.
Finally, and most importantly, the space for U.S. fiscal policy has become smaller and smaller.The U.S. economy was able to control the surge in debt after 2000 because the initial debt level of 32% of GDP provided fiscal space for additional borrowing.
Moreover, a sluggish economy, the Federal Reserve's easing, and a global savings glut drove a historic decline in interest rates, making debt more affordable for households, businesses, and the federal budget.
However, the era of a free lunch has come to an end.
Currently, the U.S. federal debt exceeds 100% of GDP and is expected to double or even triple within a few decades.
Rising interest rates make these debt levels more difficult to bear.
Once another crisis hits, how much room will the U.S. government and the Federal Reserve have to stimulate the economy?
In fact, Japan in the 1990s was somewhat trapped in such a dilemma.
Even with ultra-low interest rates and an enormous debt scale, it couldn't save the long-term weak Japanese economy, leading to Japan's "Lost Decade."
Unfortunately, U.S. politics has not caught up with this new economic reality.
There is also a risk that cannot be ignored, which could be fatal to the U.S. dollar—the weaponization of the dollar.
The U.S. increasingly uses the dollar as a weapon against countries it wants to retaliate against.
Using the dollar as a tool of foreign policy and overusing such sanctions will make more countries worry about losing access to the dollar, thereby encouraging them to shift from the dollar to other alternative currencies.
More and more countries are beginning to explore alternatives and seek to use non-dollar currencies for settlement in international trade.
Since January of this year, the United Arab Emirates and India have started using their own currencies for direct trade.
ASEAN countries have also made progress.
In May of this year, Thailand and China signed the Memorandum of Understanding between the People's Bank of China and the Bank of Thailand on Promoting Bilateral Local Currency Transaction Cooperation Framework; in August, Vietnam and China also signed the Memorandum of Understanding between the People's Bank of China and the State Bank of Vietnam, aiming to promote cooperation in areas such as local currency settlement, local currency swap, and cross-border payment connectivity between the two countries.
The Latin American region, long seen as the "backyard of the United States," is also trying to break away from its dependence on the dollar.
Bolivia recently joined the Southern Common Market (known as "MERCOSUR") and plans to join MERCOSUR's "local currency payment system."
This system allows MERCOSUR member countries to settle bilateral trade in their own currencies.
There is no doubt that Washington's dangerous borrowing binge will continue.
It's just uncertain where the U.S. dollar will ultimately go under such a "drinking poison to quench thirst" model.