US Debt Crisis: Revelations of inevitable Retribution

US Debt is a National Security Threat. The US Debt has reached a record 31.64 Trillion USD in January, 2023. There are no signs of slowing down the US debt and all what the US governments do is raise the debt ceiling and work on reforms. According to economic standards, Nations accumulating total debt equivalent to 30%-50% of its GDP is considered healthy. This feat is encouraged to accelerate economic growth. Accumulating a debt to GDP ratio of 75% is considered the end of the healthy zone. But this is not the case here; the US debt to GDP is disastrous:

Pre-COVID, the US Debt to GDP Ratio was already in the danger zone of Debt>GDP. The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default, which could cause a financial panic in the domestic and international markets. Post-COVID, the US debt to GDP ratio went to +120%. The US debt has caused the US economy to slow down its growth, suffer high inflation, decrease global influence and loss of global faith in the US. All of this happened and the US has yet to face Economic Retribution. The US Debt risks on the US Economy are very high that cannot be mitigated by the US government and Federal Reserve Bank. We could say that the US might not survive another crisis like the GFC and COVID-19. Any more troubles would mean the demise of the US supremacy.

?It all started in March, 2020. The US Economy was taken by a storm by the COVID Outbreak. It was a true crisis. First, there is the health crisis and the shortage of medical facilities, equipment and medications to identify and treat the virus. Then, the unemployment crisis, the Unemployment rate reached 15% that means more than 15 million US citizen became unemployed and required income. Due to the uncertainty of future outcomes, people chaotically bought great amount of goods without immediate need. This has resulted in shortage of goods and services. The businesses froze which led to lay off and default on credit payments. The banks suffered liquidity crisis and could not provide personal and business loans. A major liquidity issue occurred.

The Stock market crashed, followed by the worst event possible. A lot of foreign government sold US Securities, especially long term securities, US Treasury Bonds. Governments from the Middle East and Asia as they required sold the securities to finance their troubled economy. Saudi Arabia did suffer from the decrease in Brent Oil prices during the crisis. Also domestic securities holders wanted to sell securities to either buy depressed equities or meet short term financial obligations. The 18 trillion Dollar securities market was shaken. The highly liquid securities market almost froze. There was an extreme difficulty to even execute a medium value transaction and prices of securities were volatile. All of this happened due to uncertainty, working from home, high leverage and regulations. The Prices of US Securities recorded a historical downfall:

All of this has lead the US Federal Reserve to take extraordinary measures in order to finance the massive deficit in government spending to counter COVID, support US citizens, support Business,?solve the liquidity crisis, save the securities market and save the economy from freezing. The US Federal Reserve bought 775 billion USD treasury securities and 291 mortgage based securities to save the financial market. The US Government & Federal Reserve saved the US Economy by:

·????????Easing the Monetary Policy

·????????Supporting the Financial Market

·????????Encourage banks to lend

·????????Support Corporations and Businesses

·????????Support Household and Consumers

·????????CARES Act to support citizens

These actions did save the US Economy but at the cost of the future. Just look how the debt surged:

During COVID Outbreak, the US incurred 5.71 Trillion USD in debt in FYs 2020 & 2021!?The US incurred 20% of all its previous total debt in just two years. The US treasury issued new securities and the US Federal Reserve bought them. The US Federal Reserve has printed at least new 2.5 trillion dollars bank notes in the just two years. This is the main reason of inflation.

Meanwhile, post COVID, the US Government has started a rigorous campaign to counter inflation, increase economic growth and most importantly decrease the annual governmental spending. . The great surprise lies in the interest of the US debt. The US debt interests are growing every year. You would be shocked by the total interest of debt:

The US Government does not pay the total debt interest but the Net Interest which is the net value after subtracting its own interests to indebted entities. The New interest is calculated in the total fiscal government spending. The US Government is losing a chunk of its revenues to pay the debt interest not even the debt. This contributes to the increase of the US fiscal deficit. The Deficit in the US Budget is the shortage due to the difference between government revenues to government spending.?

The deficit reached a record 3.13 Trillion USD in 2020 but the rate is going lower every year. Still the FY2022 data shows results worse than Pre-COVID. The Net Interest Payment has surged a shocking 125 Billion USD in one year. This is definitely bad for tax payers and all US Citizens. This is also the Republican reason why they should solve the debt issue at the cost of international agenda.

Keep your friends close and your enemies closer. This might be the case for the US government right now because the US debt is a National Security threat.?That’s why we have to know who owns the US debt:

The Federal Reserve share was not always this big; it has increased over the years. The COVID Crisis forced the US Federal Reserve to buy a lot of securities. Pre-COVID, the Federal Reserve held 2.5 Trillion USD of US Debt, now it holds 5.28. The means the US Fed Reserve printed around 2.8 Trillion US Bank notes in the past 3 years.

A Great part of the Debt risk, is the risk of redeeming US Securities before maturity. If the Foreign investors decided to instantly redeem 7.4 Trillion USD at loss would be the demise of the US Economy. Or the foreign investors might sell these securities to domestic investors which would be a sign of the downfall of US global influence. This is actually happening. The US Foreign Investors have sold US Treasury Securities worth 0.25 Trillion USD over the past year. According to US Treasury, the Foreign Securities status is:

The US Government is very wary of this case, especially China account. China has been selling its US Treasury Securities over the past year. If we Consider nations separately, we would find some allies backing the US like UK, some neutral countries and the BRICS alliance selling more securities over time:

The US Debt Crisis is real. The Government is wary of it, the US citizen is suffering from it, and foreign investors are quietly and slowly reducing their US Securities. The Government has to enhance its overall performance and increase exports. While the US still maintain military global dominance, it cannot finance it with this debt. The US Economy will face retribution if things keep going this way. This debt train has to stop or the US will suffer. Thanks to the US dominance and Allies, the situation is not experienced as it really is and this might stay for a very long time but it is not good. This might be a good climate for domestic manufacturing to save the US Economy.

?On a global outlook, the de-dollarization move is growing. Now, there is the Russo-Ukrainian Conflict. The US has shown the world that it has miscalculated again. By Forcing a Tight Monetary Policy and the Sanctioning the Russian Federal Bank, the US has scared a lot of nations and unintentionally forced them away from the US Dollar in order to solve their Economic problems. This strategy has even backfired on small banks in the US and in Swiss Bank in Europe. It can be argued that the US has really benefited from the Russo-Ukrainian Conflict with their Mega Military Exports to NATO Nations but this means the US its exhausting its allies even more.

References:

1. The Bureau of Economic Analysis
2. Federal Reserve Bank
3. US Fiscal Data
4. Bloomberg
5. Brooking.eu

Stay put for the last edition of the US Economy Series: US Economy Part VI – US Trade Deficit

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