US Debt Hits 40-Year High: 2-Year Yield at 4.2%, Recession Inevitable
The issues facing U.S. debt are becoming increasingly troublesome, and the safety of U.S. debt held by China is increasingly being questioned.
Let's briefly review the situation: currently, U.S. debt mainly faces two problems, and the problems faced by China's holdings of U.S. debt also have two.
01
Recently, a market research company in the United States released a report, pointing out that the current yield inversion of U.S. debt has set a 40-year record, which is also the most severe warning for an economic recession in 2023.
The degree of inversion between the two is so high, and the duration is so long, which has not been seen since the early 1980s. This 40-year record, like the previous 40-year highest inflation, both spanning 40 years, is an astonishing coincidence.
The United States has experienced economic recessions in 1990, 2001, and 2008, but compared to the years before, this time the yield curve appears even more peculiar.
Therefore, the market research company concluded that this economic recession is now inevitable, and the degree of recession may be greater than the previous three.
Advertisement
But this is only the first serious problem facing U.S. debt.
02
At the same time, U.S. debt is also facing a second serious problem, which is the total scale approaching the limit.At the beginning of December last year, the total scale of U.S. debt had already reached 31.4 trillion U.S. dollars, which is very bad news. Before the U.S. Congress further raises the limit, the U.S. Treasury will find it difficult to issue new debt, and there is no way to rob Peter to pay Paul.
The United States has always been accustomed to issuing Treasury bonds by the Treasury Department and purchasing Treasury bonds by the Federal Reserve by printing money.
However, in order to avoid the United States issuing too much debt, the United States restricts the total scale of Treasury bonds through Congress. However, over the years, everyone has seen that this restriction is just a numerical game. Every time the limit is reached, the U.S. Treasury does not try to reduce the outstanding Treasury bonds, but promotes the U.S. Congress to raise a higher U.S. debt limit.
It is not difficult for Congress to raise the U.S. debt limit again, but it is difficult for the market to accept the continuous increase in debt, and the U.S. bonds held by investors are continuously diluted.
That is to say, the credit of U.S. debt has dropped to an all-time low.
03
Faced with so many troubles of U.S. debt, what should China do with the U.S. debt it holds?
Many friends find it strange that since we have seen the problems of U.S. debt, why don't we clear the U.S. debt in our hands as soon as possible?
Let's look at a case.
Russia currently holds very little U.S. debt, less than 10 billion U.S. dollars.However, Russia's U.S. debt was not liquidated in a short period of time; the process took a very long duration. Starting from 2014, when Russia was sanctioned by the United States, it began to sell off U.S. debt, and it wasn't until recent years that the holdings were reduced to a negligible amount.
China holds more U.S. debt, and it will take even longer to reduce it.
Nevertheless, compared to its peak, over the past nine years, we have successfully reduced our U.S. debt holdings by $400 billion.
Although in the most recent year we have accelerated the pace of selling, with a cumulative sale of $170 billion from last December to now, it is clear that this pace is difficult to increase further.
This is due to two issues. The first is the issue of market liquidity. It's not just China that is selling; other countries are also selling. The force of sellers far exceeds the force of buyers, so there is a problem with selling more due to the difficulty of finding buyers.
The second issue is the impact on exchange rates. Selling U.S. debt too quickly could lead to a rapid appreciation of the Chinese yuan.
Although the Chinese yuan has depreciated significantly in the past year and is not afraid of appreciation now, if it appreciates too quickly, it will inevitably affect China's foreign trade exports.
Therefore, selling U.S. debt is destined to be a slow process and should also be a very determined one.
Leave a Comment