(Financial World) The Debt Ceiling Crisis Temporarily Relieves the Risks of the U.S. Economy
U.S. President Biden recently signed a bill on the federal government’s debt ceiling and budget, which suspends the debt ceiling from taking effect until early 2025, avoiding the U.S. government’s debt default.
Although this “farce” is temporarily over, the crisis is far from over. Data show that the current total U.S. national debt is about 31.46 trillion U.S. dollars, and the ratio of outstanding national debt to GDP has risen from 106% at the end of 2019 to more than 120% at the end of 2022. How should the U.S. government repay the huge debt of more than 31 trillion U.S. dollars?
“Because the Fed’s aggressive interest rate hikes have pushed up the interest rate level, the US government’s interest payments are also growing rapidly, and its proportion in GDP is expected to continue to increase.” Ming Ming, chief economist of CITIC Securities, said.
Yang Delong, managing director and chief economist of Qianhai Kaiyuan Fund, said that generally speaking, the ratio of outstanding national debt to GDP does not exceed 60%, which is a healthy standard, but the ratio in the United States has exceeded 120%. On the other hand, it is generally believed that the proportion of government debt interest repayment to fiscal expenditure should not exceed 10%, and the United States has also reached this level.
Li Yimin, a researcher at Shenwan Hongyuan Securities Research Institute, analyzed that the debt ratio and deficit ratio in the United States have exceeded the warning line, and the growth rate of debt far exceeds the growth rate of GDP. With interest rates remaining high, the prospect of inflation is unclear, and the potential risk of repayment of debt and interest has increased.
Recently, Dalip Singh, a former economic adviser to the Biden administration, said that the debate between the White House and Congress in the United States will have “long-term traumatic effects” and “put the dollar at risk.” Indeed, there are more crises looming now than just debt.
First, in the short run, financial conditions will tighten.
Obviously, after the debt ceiling is raised, the U.S. Treasury Department will issue a large amount of bonds to supplement the general account (TGA) funds (the savings account held by the U.S. government at the Federal Reserve), which will further drain the dollar liquidity, especially in the banking system. fluidity. At present, the TGA account balance is at a historically low level. Based on the calculation of the fiscal revenue and expenditure by the U.S. Treasury Department, the Treasury Department is expected to withdraw more than $1 trillion in liquidity in the next few months.
Second, in the medium term, the probability of such a crisis happening again is still high.
The mismatch between the current debt ceiling system and the U.S. fiscal situation is becoming increasingly prominent. Li Yimin believes that the long-term trend of U.S. fiscal imbalances, deepening bipartisan games, and an unstable U.S. credit system is still continuing. The probability of a debt ceiling crisis is still high.
Finally, in the long run, the U.S. government’s “exchange of new debt for old debt” approach is not sustainable.
Li Yimin said that with the continuous accumulation of U.S. fiscal debt, the risk of adjusting the priority of national debt interest payments and transferring fiscal pressure through U.S. debt defaults has increased, and the U.S. credit system and international financial stability are facing challenges and risks.
On the one hand, the delay in interest payment or even default on U.S. treasury bonds will cause losses to many international institutions. Once global investors sell U.S. bonds, the turmoil in the global financial market will increase, triggering a new sell-off and liquidity crisis, and a run on U.S. bonds, securities and U.S. dollar deposits may occur at the same time.
On the other hand, the U.S. government has increased the scope of financial sanctions and continued to overdraw USD credit. Countries are worried about the credit of the U.S. dollar, and the fluctuation of the U.S. dollar exchange rate will increase, which will lead to an increase in the use of local currency settlements among countries, and a decline in the U.S. dollar’s share of international reserves and settlements. Data show that in January this year, at least 16 countries around the world sold US treasury bonds, and more and more countries realized the unsustainability of the US debt economic model and the unreliability of US dollar assets.
“The U.S. government debt is snowballing, which will bring a series of problems sooner or later.” Yang Delong said that one day, the status of the U.S. dollar as an international payment currency may be shaken, which will have a negative impact on the U.S. snowballing debt ceiling. Come challenge. (over)