Can the world afford a scenario where US debt bomb explodes? The question albeit hypothetical has straightforward answer: Not at all directly. But indirectly the entire globe would be rattled due to the after effects of the debt explosion spreading far and wide in geoeconomics. Howzat? Read thru this blog post:
Contrary to the misconceived idea that foreign countries and institutions are holding big chunk of US public debt, the real truth is only about 20% of the debt being held by foreigners and the rest is owed to the domestic parties within America such as pension, social security and mutual funds.
Still for that matter foreign holding is indeed sizeable because the demand & supply dynamics are mostly affected by them rather than the domestic bondholders. For example, when China began liquidating her holding from more than US$ 2.2 Trillion couple of years ago to the present lower figure, fear ran through the spines of US Treasury. As at present China descended to the second place in the ranking of bond investors at US$ 868 Billion after Japan’s portfolio of US$ 1,127 Billion. UK coming far behind at US$ 680 Billion.
Right now the total US debt outstanding is around US$ 32.60 Trillion whereas the global debt is soaring over the estimated equivalent of US$ 305 Trillion. Quite a large proportion is not denominated in US Dollars in any case. But what shook the US Treasury is the fact in April 2023 alone foreign parties have liquidated around US$ 140 Billion. Consequently three questions arose:
1. The Treasury Department reached its debt ceiling of US$31.4 trillion in January 2023, and after months of debate, lawmakers voted in June to suspend the ceiling until January 2025.
2. Replacing the old short term debt by issuing new long term bonds. The 2 to 10 Years bond is the favourite while issuing bonds maturing over 20 years is also contemplated.
3. But the immediate issue faced by the Treasury is to stop the bleeding. Hence the trip by Treasury Secretary Janet Yellen to meet up with Chinese counterparts in Beijing. On conclusion of the meet understanding is reached that a temporary halt of Chinese liquidation is to be applied. It must be remembered that in 2008 when US faced severe financial crisis China lent her helping hand by investing in US treasuries to forestall it.
Without the glare of the public glance leaders in both America and China understood that they need each other to avert any major financial and geoeconomics catastrophe. This cataclysm arises either or both from two unrelated developments outside the purview of both powers.
One relates to the quantum of Non-American debt issued by countries that are denominated in US dollars. The Eurodollar is one such instrument sold by non-American banks or corporations situated outside the U.S. At present, the outstanding of these bonds amount to over US$ 100 Trillion, where most part of these remaining unregistered.
Second one is the un-recorded dollar denominated debt issued by shadow banks that are not registered anywhere in the world. Estimated to be around US$ 65 trillion this offers double whammy to international financial system.
The bottom line is If and when US Dollar debt explodes it amounts to an accidental Samson Option being exercised by unknown parties bringing down the entire geoeconomics structure of the globe.
Cheers!
Muthu Ashraff Rajulu
Business Strategist
Mobile: + 94 777 265677
E-mail: cosmicgems@gmail.com
Blog: Business Strategist
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