Currently, the U.S. debt system is receiving widespread attention, as the total U.S. debt has surpassed $35 trillion. Many experts are concerned, believing that the risk of defaulting on dollar-denominated debt cannot be ignored.
However, if we view the issue from a different perspective, we might find that the U.S. debt crisis is not as severe as many imagine.
In reality, as long as the U.S. continues its unique "left hand to right hand" operation model, the debt crisis may not unfold as expected.
To understand this, we need to examine the current structure of U.S. debt and the dynamics behind it.
To accurately grasp the essence of the U.S. debt crisis, we first need to look at the distribution of U.S. debt.
Many might think that U.S. debt is primarily held by foreign governments, especially large economies like Japan and China.
However, this is not the case. The largest creditors of the U.S. are not foreign countries but domestic institutions.
As of now, the countries holding the most U.S. Treasury securities are China, Japan, and the United Kingdom.
Among them, Japan holds the most U.S. debt, exceeding $1 trillion, with China and the UK holding slightly less.
However, the combined total of U.S. debt held by these three countries is only about two to three trillion dollars, accounting for roughly 1/10 of the total U.S. debt.
Thus, the total amount of U.S. debt held by foreign countries is only $8.2 trillion, which constitutes 23.5% of the U.S. debt.
The remaining 70% or more of U.S. debt is held by domestic institutions.
A deeper understanding of the U.S. debt structure reveals that domestic debt holders play a significant role.
The Federal Reserve and various government welfare funds are the largest domestic holders of U.S. debt.
The Federal Reserve alone holds $4.4 trillion in debt.
This means that the largest buyers of U.S. debt are actually domestic institutions, not foreign governments.
This "left hand to right hand" operation model, where the U.S. government issues debt and then related institutions and funds purchase it, creates a debt cycle.
Although the Federal Reserve does not have the power to print dollars, it does have the authority to issue them, allowing it to theoretically create unlimited amounts of dollars to support government debt needs.
This cycle mechanism enables the U.S. to maintain relative stability despite rising debt levels.
The fundamental reason for this debt model is to mitigate financial risks.
If a large portion of U.S. debt were held by foreign governments, it could pose a threat to the U.S. economy.
China once held about $1.3 trillion in U.S. debt at its peak, when the total U.S. debt was around $10 trillion.
This gave China a significant position in the U.S. debt market and had a profound impact on U.S.-China relations.
To reduce external threats, the U.S. gradually sold U.S. debt to domestic investors.
This approach not only reduces the impact of foreign influence on the U.S. economy but also avoids financial turbulence caused by foreign investors selling U.S. debt.
While this model allows dollars to circulate between domestic and international markets, it also ensures long-term financial stability.
Although this debt structure can stabilize the economy to some extent, unlimited debt issuance may bring some economic issues.
First is the issue of confidence. Investors' confidence in U.S. debt directly affects their view of the U.S. economy.
If the total amount of U.S. debt continues to rise and even surpasses the total U.S. economy, investors may become uneasy.
This panic could lead to investment withdrawals, causing a greater economic impact.
Second, excessive issuance of dollars can lead to inflation. During the Trump administration, the U.S. significantly increased government spending to stimulate the economy, resulting in a surge in the dollar supply.
While this measure temporarily boosted economic data, it also triggered severe inflation.
This led to a decline in the quality of life for ordinary people.
The Federal Reserve responded to inflation by raising interest rates, aiming to reduce the dollar supply in the market to control inflation.
However, due to the previous over-issuance of dollars, inflation remains higher than expected.
The challenge for the U.S. is how to find an effective balance while continuing to issue debt, to avoid economic collapse or financial crisis.
The U.S. may continue to address the debt problem by exporting inflation globally, circulating dollars worldwide to alleviate domestic inflationary pressures.
However, this approach could affect the credibility of the dollar and adversely impact U.S. dollar hegemony.
Major economies might be unwilling to bear U.S. inflation, which will pose more challenges for U.S. diplomats.
In conclusion, the U.S. debt problem is not as simple as many think.
Although the largest buyers of U.S. debt are domestic funds and institutions, this debt model also faces risks of confidence crises and inflation.
In the future, the U.S. needs to seek a balance between debt and economic development to cope with the changing economic situation.
While the Biden administration has made some progress in controlling the growth of debt, optimizing policies to ensure a smooth resolution of the debt problem will be a key task moving forward.
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