US President Biden signed the bill on the federal government's debt ceiling and budget on June 6, local time, which means that the protracted farce of the US debt ceiling has come to an end. However, in both the long and short term, the risk of US bonds has not abated. The increasing scale, the unchanging habits of political party rivalry, and the possibility of liquidity challenges in financial markets all indicate that the US debt ceiling issue has only been temporarily shelved, not really eliminated, and may still threaten the US and global economies in 3 after the next presidential election. Considering the impact of high inflation and increased downward pressure on the economy, the US economic risk is still only a little more.
On June 6, local time, US President Joe Biden signed a bill on the federal government's debt ceiling and budget, making it officially effective. The bill had previously passed the U.S. House of Representatives and then the Senate.
The bill suspends the debt ceiling until early 2025 and limits spending in fiscal years 2024 and 2025. The bill also provides for the recovery of some undiscarded budget allocations and stricter restrictions on certain federal welfare programs. This is the 103rd time the United States has adjusted its debt ceiling since the end of World War II.
On the surface, the protracted farce of the US debt ceiling has finally come to an end, but in the long and short term, the risk of US debt has not been reduced, and today's policy is still a symptom but not a cure, and this "time bomb" is still a threat.
First, the "snowball" of U.S. debt continues to grow and shows no signs of slowing down. Data show that the total US national debt has exceeded $31.46 trillion, and the proportion of outstanding national debt to gross domestic product (GDP) has risen from 2019% at the end of 106 to more than 2022% at the end of 120. The Congressional Budget Office predicts that in 10 years this proportion will rise further to 132%.
For developed countries, the proportion of unpaid government debt to GDP is generally no more than 60%. The US debt ratio has doubled above the warning line, and debt growth has greatly exceeded GDP growth. If GDP is used as a measure of a country's solvency, then the United States is already seriously "insolvent".
However, with the hegemony of the dollar, the United States has no fear of borrowing in large quantities. Some analysts believe that the widespread use of the US dollar in international transactions has given the United States the excessive privilege of trading and borrowing in its own currency at preferential interest rates, thus hijacking the interests of some sovereign countries and global investors. This "too big to fail" monopoly advantage has created the strange phenomenon that the United States is "insolvent" and not bankrupt. This is why the United States must take various measures to vigorously maintain the hegemony of the dollar. However, if the United States lacks real solvency, its behavior of infinitely expanding its debt and taking on new debts to pay off old debts is no different from a Ponzi scheme, and there will be an unsustainable day.
Second, the bad habit of political party fighting in the United States is difficult to change. Politicians in Washington have long had a habit of borrowing money for wars, tax cuts, and election promises, leading to rising government debt.
For the US government, in order to fundamentally alleviate or even solve the debt problem, it must take a series of effective measures. For example, removing illegal trade and investment barriers and improving the balance of payments; curbing excessive financialization and boosting the real economy; Reducing non-essential military spending; reducing the use of extreme monetary policies; Wait a minute. But these moves are thankless and detrimental to the short-term interests of U.S. politicians.
Judging from the results of this game, although the two parties finally reached a compromise, they only pressed the pause button for the "US debt bomb" pointer. The US media pointed out that the debt ceiling issue has been put on hold for the time being, but the issue may threaten the US and global economies in 2025 after the next presidential election. German media said that partisan fighting in the United States has hindered the search for a permanent solution, undermined the budget process of Congress, and led to the repeated recurrence of the US debt ceiling issue.
Third, the easing of the US debt ceiling issue does not mean that the "alarm" of the US financial market has been lifted. Some analysts believe that after reaching the debt ceiling agreement, the US Treasury will issue a large number of bonds in a short period of time to "quickly fill the empty treasury." JPMorgan Chase expects the U.S. Treasury to issue nearly $7.1 trillion in Treasury bills within seven months of the federal government's debt ceiling being raised.
This will further drain dollar liquidity. This will not only exacerbate the recent widespread outflow of deposits in the banking sector, exposing banks to greater liquidity pressures, but may also push up interest rates on short-term loans and bonds, further raising the cost of financing for companies already under pressure in a high interest rate environment. Industry insiders are concerned that the drying up of bank liquidity "could have a more significant impact on risky assets, especially at a time when uncertainty in the financial sector has increased."
It should also be noted that the two parties have repeatedly "played with fire" on the debt ceiling issue, which has seriously damaged the US national credit that endorses the US dollar. At the same time, in recent years, the United States has frequently wielded the "sanctions stick", continuously increased the scope of financial sanctions, and continued to overdraft US dollar credit. More and more countries are beginning to get rid of excessive dependence on the US dollar and explore the path of "de-dollarization" by diversifying currency reserves, establishing local currency settlement mechanisms and strengthening international cooperation.
As of the fourth quarter of 2022, the US dollar's share of central banks' foreign exchange reserves fell to 58.36%, the lowest level since data began in 1995, according to the International Monetary Fund. At least 3 countries around the world sold U.S. Treasuries in January, according to the U.S. Treasury's latest report on international capital flows, released in March. This trend reflects a growing awareness of the unsustainability of the U.S. debt economic model and the unreliability of dollar assets.
With the end of the US debt ceiling issue, the focus of the market has once again returned to the future fiscal and monetary policies of the United States. On June 6, local time, data released by the American Institute for Supply Management showed that the US manufacturing purchasing managers' index (PMI) in May was 1.5%, down from 46.9% in April, and has shrunk for seven consecutive months, with the longest contraction since 4. Among them, new orders accelerated to shrink, and raw material costs fell at the fastest rate in nearly a year. Weak economic data has darkened the outlook for the U.S. economy. Although the US debt ceiling crisis has temporarily eased, considering the impact of high inflation and increased downward pressure on the economy, the US economic risk is still only a little more.
Sun Changyue