As the chart below shows, as total U.S. debt has surged to $30.6 trillion, there is now growing concern that excessive interest rate hikes will raise the cost of interest on U.S. federal debt, increase the risk of a debt crisis, and potentially trigger a recession, effectively losing the Ability of the Treasury and the Fed to bail out their own inflated debt.
Of course, some readers will also think that the United States can solve the problem of debt costs as long as it prints money, and there is no debt crisis at all, but once the United States does this, it is bound to have a long-term impact on the status and value of the dollar.
Because, now, the whole of the United States is built on the dollar as a reserve currency, which is the secret to the operation of the US economy, once the dollar is just another currency, then it is over, the Fed knows it, so it also means that the challenge for the Fed may have just begun.
Because, with the Fed raising rates of 225 basis points four times since March this year, the cost of interest on debt paid by the United States has increased rapidly, and the sharp rise in interest rates has begun to constrain the US consumer confidence index, employment, new orders and productivity, making the US treasury lose growth momentum.
U.S. financial website Zerohedge reported on July 27 that if U.S. debt reaches $31 trillion, if interest rates are raised to near the historical normal level of 4% (expected to rise to 3.9% by the end of the year), it will mean that the interest paid by the United States will reach a staggering $1.24 trillion a year, and the debt burden will reach 135% of GDP in 2023.
It is clear that the US interest rate hike has pushed up the US borrowing costs, triggering a strong sell-off in the US bond market so far in 2022, Fitch in the July 29 release of the report emphasized that the US "new to pay back" debt economic model will be challenged by the rise in credit and financing costs, please refer to the chart below, the BANK of The Us dollar between the Fed's balance sheet reduction and the cost of interest repayment.
So, this explains why the Fed has been insisting last year that inflation is temporary, and this is what makes it difficult for the Fed to control inflation and how much to tighten monetary policy.
The answer is clear, the Fed will covertly pass on the risk of high inflation and trillions of debt costs, just as U.S. companies will pass on higher costs to consumers, Fed Governor Waller's August 2 speech provides us with footnotes, he said, "The Fed does not consider spillovers to other countries when formulating monetary policy", so what does this mean for the market?
This has also made Sri Lanka, Bangladesh, Pakistan, Ghana, Tanzania and Ethiopia seek help from the IMF in the past month, and Sri Lanka has become the first country to declare bankruptcy.
According to a report released by Bloomberg on August 2, in addition to Sri Lanka, Bangladesh, Pakistan, Ghana, Tanzania, Ethiopia, turkey, El Salvador, North Africa, Tunisia, Morocco, Ecuador, Rwanda, Kenya, Ukraine, Bahrain, Namibia, Gabon, Angola, Senegal, South Africa, Costa Rica, Dominica, Colombia, Nigeria, Argentina and other 19 representative countries.
Because the long-term foreign currency bond yields of the 25 countries above have risen sharply by about 10% to 15% since January 2022, this also means that investors are selling off the sovereign debt of these countries, making the risk of debt thunderstorms rise sharply, which also means that the aggressive interest rate hikes and balance sheet reduction storms in the United States are having an impact on those markets with a single economy, high inflation, high external debt and shortage of foreign reserves, and even fall into the risk of recession returning to the original shape, leading to national bankruptcy, but the matter is not over. Current market data is even more insidious.
In addition to these countries, Vietnam, India, Brazil, Egypt, Indonesia, and Mexico may have fallen into the dollar debt trap.
In its july 13 economic forecast report, the IMF stressed that while Vietnam's imports and exports are growing, the country's dollar foreign debt is expanding faster, and has been listed by international agencies as the country most in need of fiscal consolidation in Southeast Asia, and warned Vietnam to be aware of inflation and default risks.
Vietnam's external debt accounted for the process of GDP change
Global asset management company Yingshiman said in its latest report on August 1 that although Vietnam's economy is undergoing multi-faceted reforms and obtaining some eye-catching economic data, Vietnam is still a low-income country, and a major feature of the current situation is that debt is high, the agricultural economy is dominant, it is heavily dependent on foreign capital, and it relies on low-end manufacturing to support the economy.
In this regard, the US financial website ZeroHedge also analyzed in an article published on July 27 that considering that Vietnam cannot cope with the continuous rise in the cost of dollar borrowing, the Vietnamese economy is likely to become a "victim" of being harvested by the United States after the Fed's aggressive interest rate hikes and the US recession.
The real reason behind this is, first, because Vietnam, like India, has been indulging in the dollar debt trap for many years, and some people are trading with Wall Street interest groups. Second, most of the profits in Vietnamese factories are in the hands of foreign manufacturers such as Europe and the United States.
Third, with the acceleration of the shrinkage of the purchasing power of the US dollar leading to the rise in commodity prices, and the United States using the tight dollar cycle policy to harvest seigniorage taxes and currency spreads, Vietnam's foreign reserve assets may be rapidly depleted and lead to some debt and exchange rate risk storms, which also shows that Vietnam has been unable to avoid being harvested by US dollar capital, and some smart investors have withdrawn from the Vietnamese market in advance from March this year.
That is to say, once there is a problem with the economic growth of the United States or the macro environment of the Vietnamese economy, then the external environmental impact of Vietnam will be multiplied, Reuters analysts further pointed out that Vietnam, which was once known as an economic miracle, may become a victim, and the economy may have the risk of a continuous recession, similarly, Vietnam has also sounded the alarm for the 30 countries above. (End)