01, U.S. Debt Exceeds Legal Limit and Defaults
Recently, news of the U.S. debt balance exceeding the legal limit has been relentless. Some reports indicate that the current U.S. debt balance stands at $31.36 trillion, with a $40 billion shortfall from the limit, while other reports suggest that the current debt balance has reached $31.41 trillion, not only exceeding the limit but also surpassing it by $10 billion.
In fact, whether it exceeds the limit or not is just a matter of a few tens of billions, and the key is not in these few tens of billions, but in the total of $31 trillion.
At present, the United States' debt has far exceeded its Gross Domestic Product (GDP). The U.S. GDP in 2021 was $23 trillion, while the current total debt of $31 trillion is equivalent to the combined debt of several countries following the U.S. in GDP ranking.
Calculated based on the number of households in the United States, the average debt per household is $236,000, and when averaged per person, the debt amount reaches $93,000 per person.
02, Increasing Interest Rates
This year, as the U.S. dollar has continuously raised interest rates, the yield on U.S. debt has also been increasing, and the interest costs that federal debt needs to repay in the future are also continuously increasing.
In the fiscal year of 2022 alone, the United States paid $475 billion in interest, an increase of $120 billion compared to the previous year.
At the same time, we can also predict that in the fiscal year of 2023, the United States' expenditure on national debt interest will further increase to $737 billion, which is close to the $800 billion budget used for defense.
The United States faces tremendous pressure even in repaying interest, let alone the principal of $31 trillion that needs to be repaid. It seems that a U.S. debt default is inevitable. Once there is a problem with U.S. debt, it is equivalent to detonating a nuclear bomb in the financial market.03, Negative Interest
While a default on U.S. Treasury bonds may still be a matter for the future, the losses caused by holding these bonds are a current issue.
We all know that if we deposit money in a bank and the bank's interest rate is lower than the inflation rate, then the money we deposit will depreciate.
Under such circumstances, people will take out their money, either to find a place with higher returns or simply to spend it.
But this is the situation we are in with U.S. Treasury bonds. Although the yield on U.S. Treasury bonds has risen this year, it is still far below the inflation rate in the United States.
In the first two months of the year, the U.S. CPI had already reached 7%, and it has been above 8% since March. It once peaked at 9.1% in mid-year, and finally fell below 8% in the most recent month, but it is still as high as 7.7%. This means that the average inflation level this year has reached at least 8.5%.
Let's compare this: the current yield on 10-year U.S. Treasury bonds is 3.5%, which was slightly higher in the past, exceeding 4%, but at the beginning of the year it was less than 1.5%. So, if we calculate the average yield on U.S. Treasury bonds this year at 2.5%, the difference with inflation is 5 percentage points.
In other words, holding U.S. Treasury bonds actually cannot keep up with inflation, resulting in a loss. Holding U.S. Treasury bonds is equivalent to giving the U.S. Treasury a negative interest payment.
04, Sharp Decline in U.S. Treasury Bonds
Additionally, we must not overlook that while the yield on U.S. Treasury bonds has increased from less than 1.5% at the beginning of the year to 3.5% now, it may seem like the yield has improved, but in reality, the price of U.S. Treasury bonds has fallen.This is because central banks and numerous financial institutions around the world are selling U.S. Treasury bonds, resulting in a much stronger selling force than the buying force for these bonds.
Now, there is even a drying up of liquidity for U.S. Treasury bonds. In other words, there are too many sellers and too few buyers willing to purchase.
Under these circumstances, the price of U.S. Treasury bonds continues to fall, which is another loss for the bonds we hold.
05, Hard to Improve
Is this loss short-term or long-term?
It seems that there will not be much change at least until 2023.
Firstly, in terms of inflation, even the Federal Reserve has recognized that the current high inflation is not temporary. Although the U.S. has raised interest rates significantly multiple times, the rate of inflation decline is slow, so it is highly likely that inflation will remain around 6% next year.
The risk of holding U.S. Treasury bonds with a yield lower than inflation still exists.
On the other hand, while the Federal Reserve has hinted that it will reduce the magnitude of interest rate hikes in December, it has also mentioned that the future terminal interest rate will reach above 5%.
This implies that the Federal Reserve will continue to raise interest rates in 2023, which could lead to further declines in the price of U.S. Treasury bonds.Recently, both China and Japan have been selling U.S. Treasury bonds with a significantly greater intensity than in the previous months. This indicates that the selling pressure on U.S. Treasury bonds remains substantial, and there is continued downward pressure on prices.
It appears that the nuclear bomb-level risk associated with U.S. Treasury bonds is becoming increasingly likely to be detonated at any time.