Recently, while writing about inflation in the United States, I expressed a viewpoint that the high debt accumulated by the U.S. during the pandemic must be repaid with high interest rates; otherwise, inflation will ensue. Some people find this hard to understand, arguing that the dollar is a global currency. As someone in the U.S. once said, "The dollar is ours, but the problem is yours." However, I hold a common sense belief that repaying debts is a matter of course, and not repaying money is akin to killing one's parents. Although the U.S. possesses dollar hegemony, debt crises can still occur.
Debt does not always lead to a crisis; the key lies in the amount of debt. In 2008, during the financial crisis, the U.S. financial system took 27 months to raise interest rates by 425 basis points, and inflation was much lower compared to the current situation.
Why was there no high interest rate in 2008, but there is one now?
Thus, the question should return to why inflation is much higher this time compared to the past.
Since 2008, the U.S. economic model has shifted to government debt-driven growth. The proportion of U.S. government debt to GDP has skyrocketed from less than 60% to over 120%, heading towards 130%.
The U.S. government leverages its dollar credit to borrow at low interest rates globally, then cuts taxes domestically, reduces corporate financing costs, increases corporate profits, and stimulates economic growth. In simple terms, the economic growth of the U.S. over the past decade has been exchanged for a surge in government debt.
While printing money excessively, the U.S. has been recycling it through Treasury bonds, so inflation has not become very serious, provided that there are those who recognize and hold U.S. Treasury bonds.
However, this time, the situation is different.
During the pandemic, the U.S. has incurred a massive amount of debt, with a trade deficit of $2.45 trillion over three years. Other countries are no longer willing to increase their holdings of U.S. Treasury bonds. Data shows that over the three years of the pandemic, the newly added $8 trillion in U.S. Treasury bonds have been held by Americans themselves, with a significant decline in the proportion of overseas holders of U.S. Treasury bonds. Major holders of U.S. debt, such as China and Japan, have both reduced their holdings of U.S. Treasury bonds.So, in the absence of overseas investors increasing their holdings of U.S. Treasury bonds, and with the U.S. exporting dollars through trade deficits, there will be an excess of dollars overseas, leading to the devaluation of the dollar.
Under the condition of relatively fixed supply, monetary demand internally pushes up prices, high expenditure leads to soaring asset prices, the stock market rises, real estate rises, and the labor market becomes tight. This is what we have seen in the past, and what follows is inflation.
This is the specific manifestation of the U.S. government's debt crisis, but history tells us that high debt does not necessarily lead to high interest rates. Growth is a key factor here.
Over the past decade, U.S. Treasury bond rates have long been at around 2%, and the real rate is far more than that. Why are investors still willing to hold U.S. Treasury bonds? The key is to look forward to the value compensation brought by the appreciation of the dollar behind it, and the key to the appreciation of the dollar is economic growth.
If the U.S. economy continues to grow rapidly under high debt, then people will be full of hope for the appreciation of the dollar, and then they will choose to increase their holdings of U.S. Treasury bonds. The U.S. does not need to significantly raise interest rates to solve the current predicament. But the current situation is obviously not the case. Against the backdrop of anti-globalization and technological stagnation, not only the U.S., but also the global growth momentum is relatively weak.
At present, the U.S. government is facing an embarrassing situation.
If the current high expenditure economic model is to be maintained, the U.S. government's debt will continue to rise, and then it will have to borrow new debt to repay old debt. At this time, if interest rates are not raised, overseas investors are unwilling to increase their holdings of U.S. Treasury bonds. But if interest rates are raised, it will have a negative effect on domestic economic growth; if the government continues to issue debt internally, inflation will soar, the dollar will continue to depreciate, and the U.S. will have to raise interest rates again.
If the current high debt and high expenditure economic model is not maintained, and the method of reducing revenue and expenditure is adopted, the so-called government expenditure is someone else's income. The government's reduction in expenditure will lead to a recession, and the recession will lead to a decrease in government revenue. The rise in unemployment rate will lead to an increase in the government's new expenditure, and the fiscal deficit will expand.
In order to maintain the operation of the government, the U.S. government will have to go back to the path of issuing debt again, and return to the path of raising interest rates and recession. This is why Argentina and other Latin American countries continue to have high interest rates and high inflation in the debt crisis.
Therefore, under the background of the debt crisis, the U.S. government has only one way to go, which is to raise interest rates, and recession is the inevitable result of raising interest rates.Many people have an inexplicable confidence in the US dollar.
Indeed, for many years in the past, every time such a situation occurred, the United States only needed to lower interest rates to solve all problems. However, what I know is that no country can default on its debts. If it doesn't repay now, the problems in the future will be even more severe. It's not that there won't be retribution, it's just that the time hasn't come. When the time comes, everything will be collectively written off.
In summary, the current US government debt crisis is the result of more than 10 years of accumulation. The debt-driven model of the US government has become ineffective with the advent of deglobalization. Global investment returns have declined, leverage has evolved negatively, the US national deficit has expanded, and the credibility of the US dollar has been shaken.
In fact, the essence of the US debt-driven model is national leverage behavior. Whether it can continue to operate depends on the return on investment. During the economic upswing phase, leverage will amplify investment benefits. However, the past three years of the pandemic have brought about significant expenditures, and deglobalization competition has led to a decline in investment returns. At this time, the leverage that once existed will become a demon.
What was once sweet orange is now poison.
The fundamental reason for the bankruptcy of the US debt-driven model is that global economic growth has fallen into a predicament. The aging population of developed countries, technological stagnation, and deglobalization are the main reasons for the weak global economic growth.
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