Pathway to $35 Trillion: Unraveling US Debt Accumulation
To expand a company, one must resort to borrowing. Companies looking to grow must seek financial assistance from banks, often accumulating debts that can soar into trillions. Likewise, nations, for various reasons, often find themselves compelled to engage in debt.
If you look around the globe, you will notice that debt is omnipresent and ubiquitous. Moreover, the country with the largest debt continues to amplify its obligations unabated.
Given this mounting debt, have you ever considered who truly holds the debts? You might think, it’s simple—the debtor is responsible for repayment.
For instance, if Person A owes Person B ten thousand yuan, then B is undoubtedly A's creditor. Logically, for every debt incurred, there should be a corresponding creditor.
However, when we mention debt, we often find ourselves puzzled, hardly ever thinking about who the creditors are, as if debts spontaneously materialize. This fundamentally contradicts the law of conservation of energy.
The Core Principle of U.S. Debt
In the case of a major power like the United States, its debts balloon like an ever-inflating balloon.
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Let's illustrate this with an example, examining the historical debt issues of the once-great British Empire.
First, let’s explore the circumstances that led to the bankruptcy of this sun-never-sets empire. It turns out that the nation has depleted its wealth to the point where the sitting Prime Minister had no choice but to declare national bankruptcy, projecting its debt challenges onto the previous administration.
It is crucial to recognize that debts cannot simply vanish at will. If individuals fail to repay their debts, a country can eventually find itself entrenched in a dire bankruptcy crisis.
Thus, debts are merely transferred; they do not dissipate. The question becomes solely when the inevitable reckoning will arrive.
Why then does the U.S. debt continue to swell? How many countries will ultimately be burdened by this? The crux of the issue lies within the modern currency issuance mechanism; modern currency is essentially grounded in trust rather than true money, leading to the startling realization that debts often appear to be concocted from thin air.
For example, suppose America enjoys robust economic health and borrows one million dollars from its domestic banks.
With this sum, the bank lends it to one hundred other countries, enabling each to receive ten thousand dollars. They agree to repay this amount at an annual interest rate of 12%, but initially, these nations do not have immediate access to such funds. Thus, America proposes that they can return the money incrementally, reaping a 3% saving interest annually.
Given America’s stellar credit and leading position worldwide, these nations readily repay, particularly since they earn additional interest income each year, consequently allowing the funds to return to American hands.
America then reinvests this capital in the market, reigniting a new cycle of borrowing. After this process occurs five times, it becomes evident that debts do not just vanish but proliferate at astonishing rates through this cyclical lending method.
Therefore, these nations actually owe America five million dollars, along with hefty interest charges, while America owes these countries five million dollars in deposits with annual interest payments.
Currently, it has become a considerable challenge for America to merely cover interest payments, let alone address demands for cash withdrawals, which would pose a catastrophic risk of collapse.
At this point, you might be gradually grasping the intricate mechanisms behind this debt rotation game: as the initially promised interest payments become increasingly difficult to fulfill, the flows of seemingly ephemeral funds reveal themselves to be nothing more than illusions.
Thus, the essence of the debt relationship implies that as long as America maintains a prosperous economy, it can indeed leverage time to manage its issues.
However, the current reality indicates a deviation from this stability, as the U.S. economy begins to falter while the Federal Reserve remains reluctant to lower interest rates, fearing the onset of a crisis.
The Hidden Dangers of Rising U.S. Debt
By the end of July this year, the U.S. national debt balance has exceeded an astounding thirty-five trillion dollars for the first time, setting a new historical record.
The scale of American debt now represents 127% of its Gross Domestic Product (GDP)! While this figure does not surpass Japan’s staggering debt-to-GDP ratio, the total amount is significant. Additionally, the U.S. incurs annual interest payments exceeding one trillion dollars, which has overtaken military expenditures to become its largest expense.
In the most recent fiscal year, the U.S. managed to skyrocket its budget deficit to 1.52 trillion dollars in just ten months, and it appears that the annual budget may well approach the two trillion-dollar mark.
At this juncture, America's only viable strategy seems to be continuing the practice of "robbing Peter to pay Paul," as attempts to pressure other countries through interest rate hikes have proved futile, leaving them no choice but to persist in accumulating debt.
Upon further reflection, it becomes evident that debt represents a network of mutual obligations, where all parties assume roles as both creditors and debtors.
The reason America has been able to continually escalate its debt is due to its credibility. However, if its credibility starts to deteriorate or collapses altogether, the entire chain of debt will encounter considerable turmoil.
For instance, if countries rush to demand payments from the U.S., it will undoubtedly face an inability to meet its obligations, leading to a debt crisis that could culminate in a collapse of trust. Consequently, all nations would be left empty-handed.
This scenario would trigger bad debts that could spiral into bankruptcy, thus disrupting the chain of debts and culminating in a financial avalanche, leading to a catastrophic economic collapse in America.
As you can see, the expansion of debt ultimately mirrors a growth in credit. Yet, when this credit expands excessively, exhausting the foundational support for it, credit contraction is inevitable, paving the way for the current scenescape where money is scarce and debt pervades.
This model carries a critical flaw: while credit may contract, debts do not necessarily disappear. A contraction in credit means that borrowed funds still require repayment; if even one entity within this system fails to fulfill their obligations, the entire chain is at risk of unraveling, potentially leading to widespread collapse.
Consider the analogy of receding tides; while the water may retreat, remnants remain. Similarly, debts, likened to these remnants, do not disappear alongside a contraction in credit.
Therefore, during a phase of credit expansion, the reckless borrowing behavior of individuals, companies, or nations comes to light as liabilities become starkly apparent once the tide recedes, often triggering a debt crisis.
In periods of economic growth, profits are easy to come by, making it feasible to continuously repay debts with these earnings, thereby sustaining an expansion of credit and elongating the debt chain.
Conversely, during economic downturns, the growth rate of profits may not keep pace with that of debt, even declining overall, resulting in a gradual contraction of credit.
Nevertheless, similar to how remnants linger after a tidal retreat, debts will not diminish in response to a contraction in credit; instead, diminishing profits may necessitate even more borrowing just to maintain balance. Once this balance is disrupted, a debt crisis is imminent.
How China Responds
Lastly, let us examine China's debt data.
According to the latest figures released by the central bank by the end of June this year, China's national debt custody balance reached an astonishing 30.9 trillion yuan, while local debt custody totaled an astounding 42.3 trillion yuan. The combined total amounts to 73.2 trillion yuan.
In summary, while the United States undoubtedly carries the highest debt load amongst nations, from a holistic perspective, China's debt situation remains manageable.
Our current objective should be to continue regulating the quantity of U.S. debt while establishing our own financial defenses, in order to guard against potential collapses in U.S. debt and upheaval in the global economy, adopting a watchful approach to unfolding events.
One day, America's Ponzi scheme will inevitably collapse. When all nations feel confident that they will not be the last ones left holding the bag, it signals that the lurking risks have become quite pronounced.
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