On February 11, local time, the size of U.S. treasury bonds exceeded 22 trillion U.S. dollars, which not only broke another psychological barrier of trillion U.S. dollars, but also set a new historical record for the size of U.S. treasury bonds.
The 2008 financial crisis is the historical starting point for the unilateral sharp rise of US treasury bonds. On the one hand, the financial crisis has worsened the U.S. economy and tax revenue; on the other hand, the federal government has to urgently allocate more than trillion U.S. dollars to rescue various enterprises and stimulate the U.S. economy out of the crisis. In the face of a relative decline in U.S. government revenue and a sudden increase in spending, the size of U.S. government debt continues to expand. Under the Trump administration, it increased by 2 trillion US dollars in less than two years to the current size of more than 22 trillion US dollars. If the substantial increase in the size of U.S. treasury bonds during the Obama period was mainly caused by the financial crisis, then the increase in trump’s treasury bonds within two years was caused by tax cuts. The tax cut bill at the end of 2017 has greatly reduced the income of the U.S. federal government, which can only rely more on issuing bonds to maintain its budget.
The national debt is larger than GDP. Is the problem serious?
Simply discussing the size of U.S. treasury bonds is not enough to reflect the seriousness of the problem. If U.S. economic growth and tax growth are sufficient to cover the increase in the size of national debt, national debt is not a big problem. However, along with the absolute size of U.S. government bonds, the proportion of government bonds in GDP is also rising significantly. Before the financial crisis broke out, the proportion of US government bonds in GDP was below 60% for a long time. Even during the crisis, the ratio was only about 62%. Over the past 10 years, the proportion of U.S. government bonds in its GDP has risen sharply. Since the fourth quarter of 2015, the scale of government bonds has exceeded its GDP. In other words, the ratio of U.S. government bonds to GDP has stabilized at over 100% and is currently about 105%, ranking first among all developed economies. Looking at global economic history, if the ratio of national debt to GDP is more than 100%, financial risks and crises are more likely to occur.
However, some people think that the U.S. government debt is not much larger than GDP, because a careful examination of the composition of the government debt shows that ” Americans buy U.S. debt” is the majority, and only about 30% of the U.S. government debt is bought by foreign investors. In addition, among the holders of U.S. treasury bonds, there are also treasury bonds held by U.S. government agencies themselves. The size of such bonds is about 5.8 trillion U.S. dollars, accounting for about 26% of the current total size of treasury bonds. Among all kinds of government institutional investors in the United States, the most important investor is the U.S. Social Security Fund, which has bought about 2.8 trillion U.S. dollars of government bonds. According to this, the U.S. government does not have to worry very much about the repayment of the principal and interest of the national debt.
However, the matter is not so simple. Although this analysis has certain significance, it is essentially self – deception. First, no matter who holds the national debt, whether it is the United States itself or foreign investors, the American people or government agencies, it is always the debt of the federal government, but the debt is always to be repaid. The second is to analyze the scale of national debt held by U.S. government agencies, whose proportion in national debt is declining. Compared with 10 years ago, the proportion of national debt held by the public ( including the U.S. public and foreign investors ) in the total national debt increased by 10 percentage points, while that held by U.S. government agencies decreased by 10 percentage points. According to this trend, debts held by non-governmental organizations will become a major component of U.S. treasury bonds. This part is more susceptible to changes in market returns and economic conditions.
Debt ceiling or new battleground for Washington’s political struggle
What is more serious is that U.S. treasury bonds are constantly facing two pressing practical threats. One is the debt ceiling dispute in the political field. According to U.S. law, the federal government will issue bonds within the debt ceiling approved by Congress. US $ 22 trillion is already close to the debt ceiling agreed by Congress last time. Within a few months, the US government is likely to ask Congress to raise the debt ceiling again. However, under the current big pattern of polarization between the Republican and democratic governments and the big conflict of building a wall around the US – Mexico border, the two parties are bound to have more intense political games over the debt ceiling issue, thus increasing uncertainty for raising the debt ceiling in a timely manner.
The second is the negative impact of the federal government’s payment to debt interest. According to statistics, in the last fiscal year, about US $ 300 billion was spent on interest payments, accounting for about 7.4% of the total federal spending. With the increasing scale of national debt, the interest expense of national debt will increasingly become a major part of federal government expenditure.
The total amount of interest not only increased significantly, but also accounted for a rising proportion of the government budget and GDP. It is estimated that spending on debt interest will account for 3% of US GDP by 2030, and this figure will climb to about 7% by the middle of this century. It can be predicted that if the national debt expands according to the growth rate in the last 10 years, the US government’s expenditure on interest will exceed the social security expenditure in the future and become the largest expenditure item of the federal government. Even if we don’t consider the future interest expenditure and only consider that the United States is still in the process of raising interest rates, it is conceivable that with the increase of the basic interest rate, the interest rate on the treasury bonds with three-year and less-than-three-year maturities is also continuously rising, and the real financial burden on the U.S. government is also increasing.
Since trump became president of the United States, various hot issues that have caught people’s attention have kept on increasing, so that the incident of increasing U.S. treasury bonds has not attracted enough attention. In fact, U.S. treasury bonds have risen sharply in recent years, which is a huge ” grey rhinoceros” threatening the stable development of the world economy. It has always existed and exerted great influence, but because people are too familiar with it, they may ignore its destructiveness.
For many people, the expansion of U.S. treasury bonds is not a big deal. As long as the U.S. national credit remains and the U.S. remains the world’s number one, the game of issuing bonds and buying bonds by all parties will continue. The United States will not rely on debts or default. For the United States, it only needs to borrow money to repay old debts or even to repay interest. However, the ” grey rhinoceros” is here, whether or not it is pretending to close its eyes.