The underlying logic of the endless expansion of U.S. national debt
Although Fitch International lowered the U.S. credit rating from the highest "AAA" to "AA+", it does not seem to have any impact on the pace and intensity of U.S. Treasury bond issuance. On the basis of US$657 billion already raised in the second quarter, the United States will raise US$1,007 billion and US$852 billion respectively in the third and fourth quarters of this year. Based on the incremental issuance scale, there is no doubt that US debt will exceed US$34 trillion by the end of this year. , and the subsequent larger national debt figures will also cover the previous national debt issuance records. The international community is also concerned about whether this endless national debt expansion will eventually lead to default risks of being unable to repay as scheduled or not repaying debts.
Since it fell from a creditor country to a debtor country in 1985, the United States has never looked back and has gone further and further on the path of national debt expansion. It’s too long to mention that the U.S. national debt was US$17 trillion 10 years ago. Now it has expanded to US$32.6 trillion, a net increase of 94%, and the average annual debt issuance is US$1.57 trillion. At the same time, the proportion of U.S. national debt to GDP did not exceed 100% 10 years ago, but now it exceeds 120%, and the U.S. government sector leverage ratio (the ratio of debt scale to fiscal revenue) is about 13% higher than the average of G20 group members. In addition, if the debt is divided, it is equivalent to a debt of US$236,000 per American household, and a debt of approximately US$100,000 per person. Not only that, the market predicts that the U.S. national debt will exceed $50 trillion by 2030.
The continuous and substantial expansion of the national debt scale actually reflects the basic mirror image of the long-term imbalance of public finance revenue and expenditure. Except for a few years, the U.S. government has historically been unable to make ends meet. Looking at the last 10 fiscal years, U.S. fiscal revenue did not exceed US$4 trillion until fiscal year 2021, but fiscal expenditures exceeded US$4 trillion as early as 2018. If the average fiscal year is used, the average annual fiscal revenue in the 10 years is 3.7 trillion U.S. dollars, the average annual expenditure is 5 trillion U.S. dollars, and the annual fiscal deficit is 1.30 trillion U.S. dollars. Among them, the deficit in fiscal year 2020 is the largest, reaching 3.1 trillion U.S. dollars, accounting for GDP ratio rose to 16%. Overall, the average annual fiscal deficit in the United States has remained above 7% in the past 10 years, and the deficit in fiscal year 2023 will reach US$1.57 trillion.
Theoretically, the fiscal deficit of the previous year can be made up with the tax revenue of the next year, but the problem is that the fiscal deficit will continue to occur in the next year or even the next year, so the hope of filling the fiscal gap can only be pinned on borrowing. Borrow money. Data show that in the entire fiscal expenditure, the proportion of U.S. Treasury debt revenue generally remains at about 30%, which means that 30% of the revenue to maintain fiscal balance needs to come from Treasury debt, and the fiscal dependence on Treasury debt reaches 30%. However, as the scale of debt increases, the pressure on interest payments will also increase. Statistics show that U.S. federal fiscal interest expenditures reached US$475 billion in fiscal year 2022, and may exceed US$660 billion in fiscal year 2023.
Issuing treasury bonds is a common practice for almost all countries in the world, but no country can sell its treasury bonds around the world without any promotion like the United States. It has even been heavily allocated as a core asset by many countries. Not only that, U.S. debt has also been labeled It has received a high-level safety symbol and is widely supported and welcomed by other market entities, so much so that many investors believe that there is no risk of default on U.S. debt. Even Nobel Prize winner Paul Krugman recently It also concluded that there will be no debt crisis in the United States in the next 10 to 20 years.
It must be admitted that the sales of any kind of bond first depends on the financial strength of the borrower, that is, whether it has the ability to repay principal and interest on schedule, and has never had a record of default. Otherwise, the buying and selling logic of financing and investment cannot continue. Data show that in the past 10 years, the U.S. federal government’s revenue in the smallest fiscal revenue year has reached 2.5 trillion U.S. dollars. Even if the maximum interest payment amount in fiscal year 2023 is used as a reference, the fiscal revenue is enough to pay for four years of national debt. Interest, that is to say, in each fiscal year in the past 10 years, the U.S. government’s fiscal revenue can pay interest on Treasury bonds for at least four years. This determines that there is no default on U.S. Treasury bonds, and it also allows the market to hold more U.S. debt This provides a sense of security, and as long as the economy can reach an average annual growth rate of 2.4% as it has in the past 10 years, the U.S. government's fiscal revenue can still cover debt repayment interest, and debt sustainability can be maintained.
Of course, according to calculations by the U.S. Budget Office, current interest payments on national debt already account for 9% of the entire fiscal revenue. In the future, the remaining share of debt repayment interest on fiscal revenue will continue to increase. However, it must be clear that stable fiscal revenue is important for national debt. In terms of issuance, it only plays an endorsement role. In fact, the U.S. government cannot allow all debt interest to be borne by fiscal revenue. It is even stupid enough to actually use fiscal revenue to pay interest. Instead, it will only use the revenue obtained from additional issuance of national debt. The interest-paying function of fiscal revenue thus touches the real basis of debt expansion—US dollar credit. In short, it is US dollar credit that supports and maintains the expansion of US debt. The reason why this logical connection can be formed is related to the creation of the Federal Reserve. The way the dollar is credited is directly related.
Different from the traditional fiscal theory of "living within one's means", the Federal Reserve follows the Modern Monetary Theory (MMT). The core principle of this theory is that the main body of base money creation is a combination of the government and the central bank. Through the government's issuance of treasury bonds and the central bank's Purchasing completes the creation of base money. Specifically, the Federal Reserve creates incremental money based on the amount of national debt, and after the national debt matures, the Treasury returns the currency to the Federal Reserve. The interactive closed loop ensures that currency depreciation will not be caused by excessive spillover of the US dollar. Therefore, it can be said that the Federal Reserve creates credit and The process of recovering U.S. dollars is actually an act of maintaining the credit of the U.S. dollar. Correspondingly, although the U.S. dollar has experienced periodic declines from time to time in the flow process, the general historical trend has been continuously upward.
What we have to admit is that in addition to the Fed's way of creating money that maintains the credit of the US dollar, the global unbalanced monetary system actually constitutes another protective barrier for the credit of the US dollar. Although it has been 52 years since the Bretton Woods System disintegrated, the US dollar’s hegemony in global finance and trade remains unchanged. Of the 81 raw material price series released by the United Nations Conference on Trade and Development, only 5 are not priced in US dollars. In terms of circulation, according to SWIFT statistics, the current market share of the US dollar in international payments is 46%; in cross-border trade financing, the US dollar’s share is as high as 84%; in addition, in global foreign exchange transactions, the US dollar accounts for 88%, while financial transactions 47% of international claims are denominated in US dollars, and up to 58% of international reserves are US dollar assets. In terms of the proportion of the above indicators, the US dollar currently ranks first. This privileged status of "one currency alone" means that the US dollar is no longer a single sovereign currency, but has been given the responsibility of the global "credit standard".
It is the U.S. dollar that has acquired a unique credit that is different from other sovereign currencies and has performed very stably so far. The credit and value of U.S. dollar treasury bonds have naturally been recognized by the market. Data shows that the Federal Reserve currently holds 40% of the treasury bonds, overseas central banks hold a total of about 25%, and the two boxes together account for as much as 65%. Although for the purpose of hedging the risk of local currency depreciation, the central banks of some countries will Selling U.S. debt in the secondary market is only a short-term and strategic behavior, and excessive selling will inevitably increase the pressure on the local currency to appreciate, which in turn will curb the country's exports, weaken the foundation of foreign exchange reserves, and harm the country's balance of international payments. ability and external financing credit. This is also true. The global central bank's allocation of U.S. debt has been in a state of increasing and slowly rising. The credit of U.S. debt has also been further consolidated. U.S. Treasury bonds are the most important and safest in the world. The status of safe-haven assets has also been continuously strengthened.
The last thing to emphasize is that with the support of relatively stable currency and credit, the United States has this unique condition in the operation of sovereign debt that other countries in the world cannot create and imitate. It is precisely by virtue of its own advantages in scarce resources that it has In any investment and financing scenario, U.S. Treasury bond products are always in short supply in the market, and the failed auction of U.S. Treasury bonds has become a legend that has never happened. It is worth noting that although the latest U.S. bond auction has a Fitch rating Despite the disturbance of downward factors, the number of domestic and foreign buyers participating in the placards has been increasing, and the proportion of foreign buyers has reached a record high in history.
As the scale of debt expands, the U.S. finance will definitely feel more pressure. To this end, it needs to be diverted and resolved through economic growth, especially through fiscal austerity arrangements such as reducing public expenditures and increasing taxes. However, the result will inevitably have a negative impact on business activities and markets. Investment and consumer demand are suppressed, and this result is obviously not what the leaders want to see. On the contrary, issuing more national debt is simpler and more convenient than tightening finances, and it is easier to obtain revenue. Although it expands the fiscal deficit, if it simultaneously improves people's welfare and even stimulates the economy, not only can the governance risks be minimized, but also the government's risks can be minimized. Public reputation will also increase day by day. It seems that the expansion of US national debt will only always be on the way.
