U.S. Debt Ceiling Problem Reappears, Research Shows U.S. Debt Market Is Dangerous

　　According to CCTV news, data from the U.S. Department of the Treasury shows that as of December 1, the U.S. federal government debt has exceeded 31.36 trillion U.S. dollars, significantly exceeding the U.S. gross domestic product of about 23 trillion U.S. dollars in 2021, approaching 31.4 trillion U.S. dollars. Legal debt ceiling.

The previous data on November 30 showed that the US federal government's debt exceeded US$31.41 trillion that day, surpassing the legal debt limit of US$31.4 trillion.

　　In recent years, the U.S. government’s fiscal expenditure has continued to expand, and the debt scale has risen. In addition, since 2022, the Federal Reserve has continued to raise interest rates sharply to control inflation, and the market’s concerns about the risks of the U.S. debt market have also gradually heated up.

US debt continues to soar

　　The U.S. Congress first established the debt ceiling system in 1917, and reaching the ceiling means the U.S. Treasury Department’s borrowing authority has been exhausted.

Since 2013, U.S. government debt has grown rapidly, and since the outbreak of the new crown pneumonia epidemic, the scale of debt has surged by nearly 8 trillion US dollars.

　　In an interview with a reporter from the Securities Daily, Bo Wenxi, chief economist of IPG China, said that the expansion of the US national debt and exceeding the upper limit is mainly due to the large-scale subsidies of the US federal government since the outbreak of the new crown pneumonia epidemic, as well as the counter-cyclical Adjusted monetary quantitative easing and expansion of fiscal expenditures.

　　"The United States is a typical fiscal deficit monetization country." Luo Pan, executive dean of the Practical Finance Business School, told the "Securities Daily" reporter that since the U.S. currency mechanism is the monetization of fiscal deficits, the upper limit of U.S. debt issuance is based on the U.S. determined by the overall strength of the country.

Historically, successive U.S. governments have expanded the scale of debt in order to ease old debt problems with new debts. This has become a frequently used coping strategy by the U.S. government.

　　According to a research report released by the US Bipartisan Policy Research Center, at the end of October 2021, the US federal government had hit the then statutory debt ceiling of US$28.9 trillion. Since then, the US Treasury has taken unconventional measures to avoid debt default.

In December 2021, the debt ceiling was raised to a record $31.4 trillion.

　　In the opinion of Cheng Yu, a senior researcher at the Chinese Academy of Sciences, when the economy encounters short-term or major shocks, the U.S. federal government borrows money to increase spending to protect the cash income of enterprises and residents and then promote economic growth. This is also the debt of the U.S. federal government. The reason for such a high scale.

Substantial probability of default is small

　　In August 2011, the two parties of the U.S. government engaged in a continuous game over the issue of raising the debt ceiling, which led to the downgrade of the U.S. sovereign credit for the first time in history.

However, in the opinion of industry experts, although the current US federal government debt scale is close to the upper limit again, the probability of a "substantial default" is relatively small.

　　Luo Pan believes that, on the whole, the premise of a substantial default on U.S. government debt must be that the U.S. economy has experienced a substantial and systemic decline, and the U.S. dollar has lost its inherent status as an international hard currency. The U.S. hopes to issue national debt. Only when governments around the world and investors in the market no longer recognize and buy U.S. treasury bonds, will the entire monetary and financial system of the United States "collapse" and the U.S. government will actually default.

　　"In the short term, as the US government's debt exceeds the upper limit, a new round of games will be formed within the US government around the debt ceiling issue, but it will not change the trend of further expansion of the debt scale." Luo Pan further said.

　　In Bai Wenxi’s view, the probability of the US government’s substantive default this time is still relatively small, because on the one hand, the US Congress will have to raise the national debt ceiling when the stock of US debt has peaked; We are constantly replacing the old with the new and optimizing the term through "new for old" and "extending the term of new debt".

　　Cheng Yu also believes that the current degree of wage increase and employment rate in the United States are still relatively strong, and the fiscal revenue of the US federal government has not yet experienced a substantial crisis.

The U.S. bond market is in crisis

　　However, some market research believes that although the probability of a substantive default on U.S. debt is still small, the current U.S. bond market may be facing a multi-layered crisis.

　　According to the analysis of Lianhe Credit Research Report, the fiscal deficit of the US government is still running at a high level, while interest payments continue to rise, which will further affect the sustainability of US debt.

During the COVID-19 epidemic, the U.S. Treasury borrowed heavily, and the rise in interest rates on national debt of various maturities will further increase the pressure on government debt interest repayments.

According to the U.S. Congressional Budget Office, interest payments will account for 1.6% of U.S. GDP from 2022 to 2031, and 4% from 2032 to 2041. The interest burden will crowd out other federal spending items.

At the same time, as the debt scale climbs and interest rates rise, future interest growth will outpace tax revenue growth.

　　The reporter observed that market concerns about the liquidity and stability of the U.S. bond market have also been heating up recently.

U.S. Treasury Secretary Yellen said in a speech on October 12 that "the balance sheet capacity of market makers engaged in U.S. treasury bond transactions has not expanded much, while the overall supply of U.S. treasury bonds has been rising."

At the same time, on November 17, the September 2022 International Capital Flow Report (TIC) released by the U.S. Department of the Treasury showed that as of the end of September, the size of U.S. Treasury bonds held by foreign investors had dropped to the lowest level since May 2021.

Among them, Japan, the largest overseas holder of U.S. Treasury bonds, has reduced its holdings of U.S. debt for the third consecutive month, and its holdings have hit a new low in the past three years.

　　The above research report believes that from the perspective of U.S. debt liquidity, the Fed, as the largest single holder of U.S. debt, is a net buyer of U.S. debt during the loosening and expansion stage, and continues to increase its holdings of U.S. debt and MBS to inject liquidity into the market. However, with the opening of the balance sheet reduction process, the Fed has changed from a net buyer to a net seller, which has led to a serious shortage of US bond liquidity.

From a structural point of view, official (official and institutional) creditors are showing a tendency to withdraw from U.S. debt, the structural stability of U.S. debt holders continues to weaken, and the influx of speculative funds will also lead to increasing volatility in the U.S. debt market in the future .

　　Data show that the ICE Bofa Move Index (MOVE), which tracks the expected volatility of U.S. debt, reached 118.62 on December 2, a surge of more than 53.8% since 2022.