The biggest problem the United States is facing now is not economic hollowing out, nor inflation, nor even global de-dollarization, but the intractable default situation they face with their national debt.
A default on U.S. debt would hit the United States harder than a nuclear attack on its mainland, because a default on U.S. debt means the collapse of the U.S. federal government.
Since the U.S. federal government does not have the right to issue currency, its fiscal expenditures rely entirely on issuing U.S. debt to obtain funds. Once U.S. debt defaults, it is equivalent to the collapse of the credibility of the U.S. federal government.
The consequence of the collapse of credibility is that the trust of people around the world in the United States will decrease, and it will become extremely difficult for the U.S. government to raise fiscal funds by issuing U.S. debt.
If the U.S. federal government cannot raise enough fiscal funds for a long time, there is only one outcome, and that is to shut down.
After the U.S. federal government shuts down, the U.S. military, U.S. welfare, U.S. global diplomatic affairs, and so on, will all be paralyzed as a result.
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In a word, the collapse of the U.S. federal government means that the United States has lost the "brain" that commands the United States, which is "brain death."The "hollowing out" of the U.S. economy is merely due to the low proportion of its primary and secondary industries, but the tertiary sector in the United States possesses an extremely strong global money-drawing capability, which will not affect the economic development of the United States.
Inflation in the United States will only impact the lower-income citizens of the country and will not affect its global economic status, as many of the lower-income populations in American society are supported by the U.S. government.
The global move away from the U.S. dollar will weaken the United States' financial hegemony, reducing the effectiveness of the United States in using its dollar hegemony to impose economic sanctions on other countries. However, this will not affect the status of the dollar globally, as there is currently no currency in the world that can completely replace the U.S. dollar.
Therefore, the "hollowing out" of the U.S. economy, inflation, and the global move away from the U.S. dollar will not deal a fatal blow to the United States. The only thing that can deliver a fatal blow to the United States' current international status is a default on U.S. debt.
At present, there is a significant discrepancy between the United States' fiscal expenditures and tax revenues. The total annual tax revenue in the United States is approximately 4.5 trillion U.S. dollars, but the annual fiscal expenditure of the United States has now exceeded 6 trillion U.S. dollars.
6 trillion - 4.5 trillion = 1.5 trillionFrom this, it can be seen that the United States has essentially already incurred a fiscal deficit of 1.5 trillion US dollars.
Although the U.S. federal government can raise this part of the funding gap through debt issuance, debt issuance requires the payment of interest to bondholders.
Therefore, the more debt the United States issues, the more interest it needs to pay. The total amount of U.S. national debt has now reached 35 trillion US dollars, and the amount of interest it pays annually has already accounted for 25% of the total annual tax revenue.
It can be said that the United States is now unable to repay its debt.
Its annual tax revenue is not even enough to cover its expenditures, let alone repay the debt.
However, due to the recyclable nature of national debt, the United States can use the "borrowing new debt to repay old debt" model to maintain the credibility of U.S. debt, which has also been the consistent approach of the U.S. government for a long time.
But given the huge amount of maturing debt that the United States currently has, everyone has to start worrying about the United States' ability to repay.
If the United States cannot resolve the issue of this maturing debt, then U.S. debt will really be unwanted in the future.
Theoretically speaking, the United States does not have the ability to repay this maturing debt, after all, the amount is really huge, reaching 7.6 trillion US dollars.If the United States chooses to handle the maturing debt by borrowing new money to repay old debts, then it has only two options. One is to issue $7.6 trillion in short-term Treasury bonds to repay the maturing debt. The other is to issue $7.6 trillion in long-term Treasury bonds to repay the maturing debt. Regardless of the perspective, issuing long-term U.S. debt to repay maturing debt is always better than issuing short-term debt. This is because issuing short-term debt, such as one-year or two-year bonds, implies that the United States will face a situation similar to the current one next year or the year after. Given the current state of the U.S. economy, whether it is next year or the year after, it cannot afford to repay the $7.6 trillion in maturing debt. Therefore, converting the $7.6 trillion in maturing debt into long-term debt of 30 or 50 years is the best way to handle it, as the matters decades from now will not bring them such a sense of urgency.However, whether it's large institutions in the United States or individuals, they don't have such long-term financial planning. After all, in these decades, there will always be some investment opportunities with high returns, and they can't put all their money on something decades away.
So, if the United States issues 30-year or 50-year long-term U.S. Treasury bonds, not to mention the whole world, even Americans themselves won't buy them.
If the United States can't convert the debt that is about to mature into debt decades later, then the credibility of U.S. debt will immediately face bankruptcy.
They can't afford this outcome.
Perhaps many people will say that our China's foreign exchange reserves are only three trillion U.S. dollars, and even if we use all of them to buy U.S. debt, it won't solve the United States' problem.
But everyone must not forget that the United States does not need us China to use all our foreign exchange to buy his long-term U.S. debt at once.
Objectively speaking, China only needs to use one trillion U.S. dollars each year to buy the long-term U.S. debt he issues, and it only takes eight years to convert all the maturing U.S. debt into long-term U.S. debt.In these eight years, the United States only needs to exert a bit more effort, by issuing more short-term U.S. Treasury bonds annually and rolling them over, to avoid a collapse in the credibility of U.S. debt.
At present, the Federal Reserve frequently signals rate cuts but does not implement them, largely because it wants to induce capital to heavily purchase U.S. Treasury bonds through suggestion. After all, under a strong dollar, the price of U.S. Treasury bonds is relatively low, and once the dollar ends its strength, the price of U.S. Treasury bonds will rise.
To put it bluntly, the Federal Reserve's frequent talk of rate cuts is essentially a message to the market: "I am about to cut rates, so you should hurry up and buy U.S. Treasury bonds, as the current yield on U.S. Treasury bonds is very high."
Theoretically speaking, the Federal Reserve's strategy is effective because once the dollar cuts rates, U.S. Treasury bonds are bound to rise in value, and those who purchase U.S. Treasury bonds beforehand will inevitably reap substantial profits.
However, even if the speculative funds in the market go to buy U.S. Treasury bonds, they will not buy a large amount of long-term U.S. Treasury bonds. The reason is that once there is no demand for U.S. Treasury bonds, one would have to wait decades to get back the principal.Purchasing short-term U.S. Treasury bonds is a different story; even if there is no demand for U.S. Treasury bonds in the market, as long as the issuance period of one-year or two-year Treasury bonds is fulfilled, the U.S. government must repay the principal.
From a safety perspective, short-term U.S. Treasury bonds are far safer than long-term ones, which is also why Warren Buffett holds a large amount of short-term U.S. Treasury bonds.
It is likely that the United States' hope to resolve this round of the U.S. Treasury bond crisis by relying on market capital will end in disappointment.
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