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Recently, the news of the Fed's emergency dumping of 1 trillion US dollars has attracted widespread attention. This move makes people wonder, now that even the Federal Reserve is unwilling to take over, who does the United States expect to bear such a huge debt? Does this also mark the end of the U.S. debt myth?
If an institution earns not even enough money to pay interest every year, but still raises high-interest funds on a large scale, and promises investors that $1 million will be returned in the next 10 to 20 years, isn't this like a capital disk, a capital disk that is about to run away with money? When the funds are almost finished, it will naturally usher in a "gentleman" exit.
How is this scenario similar to the situation facing the United States today?
As of July 27, the US public debt reached $32.659 trillion, and the number is rising, according to the US Treasury. The St. Louis Fed warns that interest payments in the U.S. amount to nearly $1 trillion per quarter. Of course, this includes short-term government bonds, medium-term government bonds, long-term government bonds, and some high-interest financing. Today, the U.S. government is paying interest alone far more than expected.
According to the Department of the Treasury, in fiscal 2020, the total tax revenue of the US federal government was only $3.42 trillion. This means that the current annual revenue of the US government can no longer meet the interest expense. However, the US government continues to issue high-interest US debts and insists that it is the world's most stable investment product. Recently, the U.S. Treasury auctioned $103 billion in U.S. bonds. Strangely, however, at the same time, the Fed is selling U.S. bonds on a massive scale.
As of August 9, the Fed's portfolio size has decreased by $980 billion from its peak of $8.55 trillion in May last year, according to Wall Street News. From the perspective of the speed of balance sheet reduction, it is expected to break through the $1 trillion mark by the end of this month. This has undoubtedly caused confusion among many people, does the Fed sell trillions of US bonds, does it also have plans to run?
The Fed's explanation is that they want to end the ultra-loose monetary policy since the early days of the pandemic. But is this true?
First, it at least means that the dollar may not raise interest rates too much. As the Fed shrinks its balance sheet, there is less liquidity in the market, and the value of the currency rises accordingly. Senior economists at the International Monetary Fund predict that a $1 trillion reduction in the balance sheet is equivalent to raising the federal funds rate by another 15-25 basis points.
From this point of view, doesn't this mean that the Fed is confident that the rate hike cycle is coming to an end? At this time, the Fed's $1 trillion balance sheet reduction is not adding fuel to the fire and making the market storm more violent?
Second, it also means that the Fed is preparing to cash out. With the recent $103 billion U.S. Treasury auction, which included $23 billion in 30-year Treasury bonds, the interest rate was 4.189%, the highest since July 2011.
The new Treasury interest rate has reached a new high, which means that the old Treasury bonds in the hands of the Fed have depreciated in essence. At this time, the Fed can buy some short-term new Treasuries and then sell a large number of long-term old Treasuries, which can both reduce losses and make another profit. In the past, the Fed usually reduced its balance sheet by buying short-term bonds and selling long-term bonds.
From this point of view, the US government and the Federal Reserve seem to be in a situation where "husband and wife are the same forest birds, and they fly separately when disaster comes". The Fed may think, this hole is made by your government itself, you can't let me alone carry the pot, I have to make some money.
As the largest buyer of U.S. bonds, the Fed now also wants to get out of the market, how will this affect the U.S. bond market? In the end, who will take over this huge debt?
The Fed is the number one buyer of U.S. Treasuries, cutting its balance sheet almost twice as fast as the previous one, with plans to shrink another $1.5 trillion by mid-2025.
This timing coincides with the US government's large-scale issuance of additional debt, and the demand for US debt from foreign investors is also weakening. This will lead to higher borrowing costs for the U.S. government, and many investors who previously bet that Treasuries will prosper in the rate hike cycle will also suffer.
The Fed sold off U.S. bonds in large quantities, causing the U.S. bond market to be oversupplied
, which will cause the US government to face the problem of scarcity of buyers when issuing new Treasuries, especially long-term Treasuries. This will undoubtedly make the huge debt problem of the US government even worse.
In addition, the Fed's balance sheet reduction is also equivalent to a hidden interest rate hike, and many investors who previously held a large amount of US bonds will also suffer. The tightening of market funds will also trigger sharp fluctuations in U.S. stocks, bringing further losses to investors.
It can be said that investors will once again become the target of the Fed's "leek" cutting.
So the question is, since the Fed is ready to leave, who will take over next?
Let's take a look at the latest data: in May, Japan sold $30.4 billion in US debt, China sold $22.2 billion, and the UK sold $14.1 billion. This means that the top three overseas central banks sold a combined $66.7 billion in U.S. bonds in just one month. In addition, in these data, global private capital outflows amounted to $168.2 billion in May.
In the recent $103 billion U.S. Treasury auction, indirect buyers, including overseas investors and private investors, hit a new low since February. This shows that even if the US bond interest rate soars again, the market interest in it has been greatly reduced, and the US debt has become uninterested.
So in the end, who will be the takeover man? In this U.S. bond auction, the allocation ratio of primary dealers was as high as 12.5%, the highest proportion since February this year. Primary dealers include not only large banks, but also a number of top securities firms, which are obliged to accept the issuance of Treasury bonds in their entirety in the event of a U.S. bond auction.
Does this mean that the new treasury bonds currently issued by the US government are essentially taken over by its own people?
Finally, I would like to emphasize whether the Fed intends to leave the market and whether the myth of US debt will be completely shattered is too early to say. But what is certain is that, with current trends, it will be difficult for the United States to sustain this situation. This also explains why it has been difficult for the United States to do its own economic business, because even if it tries to operate, it is difficult to pay interest.
So when there is no one to take over the US debt, how will the US government deal with it? In the end, there may be only two options left: Lai Ji He
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