At the very beginning, this is a translation of my previous article, link below. 👇🏻
Here we go💪🏻
It's late May, which means it's time for many people to pay off their credit card bills. But it turns out the US government is in the same boat as us and can't pay its debts this time around.
As of June 1st, 2023, the US government will once again be broke. This is what we call a fiscal default, or as the cool kids say, "default".
Now, we all know that Americans love to live beyond their means and use credit like they're playing Monopoly. Well, surprise, surprise, the US government has been doing the same thing for years. To try and put a stop to this madness, Congress has set a debt ceiling, but unfortunately, the dear government has blown past it so many times that it's starting to lose its meaning. The current limit? A whopping $30 trillion!
So now, the US government is in a bit of a pickle. But don't worry, folks - dear is on the case! He's following in the footsteps of his predecessors and trying to negotiate with Congress to raise the debt ceiling. I mean, who needs a financial plan when you've got good old Uncle Sam footing the bill, right?
But if Biden can't get the job done, and Congress doesn't agree to raise the debt ceiling by June 1st, things could get pretty interesting. Picture this: the US government's credit score takes a nosedive, making it hard for them to borrow money. Suddenly, government employees are working for free, pensions are gone, and all kinds of government services grind to a halt. It's almost like a big game of chicken between the government and its creditors - who will blink first?
In conclusion, let's hope Biden and Congress can come to an agreement, because none of us want to see the US government sell off its prized possessions on eBay just to make ends meet.
Now, the prevailing expectation in the market is that Congress will still compromise and the crisis will pass. But have you ever wondered
Why the great United States doesn't have any money?
Let's take a look at history and analyse it from an economic perspective.
In 2011, the US faced default risks on its national debt for failing to raise the debt ceiling in a timely manner, which led to a credit rating downgrade for the first time.
At the time, former Federal Reserve Chairman Alan Greenspan was asked in an interview whether US government bonds were still one of the safest investments. Grandpa Greenspan responded with a shocking answer👇🏻
"The US can pay any debts, because we can always print money to do that. So there is zero probability of default."
—— Alan Greenspan
According to the World Bank, when the proportion of national debt to GDP exceeds 77%, the country's economy is likely to slow down. Can you guess what the current ratio is for the US?
It's 121% 😊
And this number is only expected to increase in the coming years.
Let's forget about foreign debt for now (such as China holding US government bonds), and focus on America's domestic debt. In theory, the US can pay off its debts by simply printing more money. This is what we call "monetisation of debt".
In traditional economic theory, this is a serious form of hidden bankruptcy with severe consequences. Because it leads to currency inflation and market rate depreciation. This combination of punches equals hyperinflation, currency devaluation, and economic collapse. In other words, it's like making the entire nation pay for the government's debt.
So back to the very question👉🏻 why does the great United States not have any money?
Let's think about it from an individual's perspective. Why do ordinary people run out of money, live beyond their means, and eventually go bankrupt?
When we live within our means and spend only what we earn, we shouldn't have financial problems.
It all starts with desire. When we want to indulge ourselves and buy something we've been dreaming of (an expensive bag? A car? A house?), we start taking on debt.
But usually, the common creditor - the bank - has rigorous risk management and evaluates our future repayment ability. They also require collateral. This seems good in moderation, and everyone benefits.
The problem comes when desire gets out of control.
If you take on debt to meet production needs, such as buying a new energy-efficient car to work as a Didi driver, that's a financially sound plan.
But if you take on debt to satisfy your desires, even to keep up with peers, that's when things start to go awry.
When you want more luxury purchases, a better sports car, or a fancier mansion, or even indulge in some luxurious hobbies and gamble away your Hustler trip... That's when things start to get really out of hand.
The fact of the matter is that after half a century of post-WWII peace, developed countries' governments have become accustomed to satisfying their sovereign desires through debt issuance: wars, hegemony, "buying" votes, high welfare...
Take a look at the below chart 👇🏻 and it’s clear US government spends, in 2022, 48% on social security, public health, and income protection, another 12% on medical care, plus other veterans' benefits, etc. Half of the government's spending goes toward the welfare of the people!
And, of course, this part of the budget is ever rising. After all, no candidate would dare say they plan to cut your benefits if elected!
Looking at the trend, this public spending will only increase over time because there are two main drivers behind it 👇🏻
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High welfare system (rigid→)
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Aging society (rising↗)
These two factors won't decrease in the medium-to-short term, so we can predict that social expenditures will only increase in our lifetime. This is the “spending” of fiscal revenue.
But looking at the "source" of fiscal revenue, there are also some problems. What most developed countries are doing is industry transfer/upgrade, which is actually the hollowing-out of real industries/basic manufacturing by moving them overseas. This has led to bloated real estate/financial industries and hollowed-out real economy.
Another even more fatal problem is that our oversea neighbour have picked up a luxurious hobby - gambling and playing high-risk financial speculation.
As we all know, the capital market is a global casino. We jokingly say that every morning when the A-share market opens, it's like the casino is opening its doors again 😊
Money isn't flowing into the real economy for production and operation but rather into the "gambling hall" for high-risk financial speculation.
These two complement each other: on one hand, there's no suitable domestic investment in real industries; on the other hand, there's the inertia of long-term gambling and speculation. This not only exacerbates economic fragility and risk but also ultimately leads to sustained shrinking of fiscal revenue.
The above is a very general overview of the social and industrial factors that have led to sovereign debt crises in the United States and many developed countries.
This does not constitute a serious discussion! But an easy-to-digest review of what’s going on.
Speaking of this sovereign debt crisis, although there has been a lot of public opinion, McCarthy and Yellen have released a lot of smoke bombs, but from our mysterious eastern perspective, it seems like everyone is already used to this political drama. Personally, I tend to think that this is just a group play under political bargaining, and most likely it will be resolved in the end, and the American Dream will continue.
What's more important may not be this single event, but rather the essence of economic development and the overall improvement of national productivity. Can the few technological elites in the US still carry the whole team and lift up the majority of overweight ordinary citizens who are living off the government subsidy? Can the struggling people in the Asia-Pacific region still shoulder the welfare of the American people as they always have? These might be bigger problems. When we can't even make ends meet at home, who will care if our neighbours can afford organic corn?
Finally, today is May 24st, Happy Tuesday. Hope you’ll treated yourself enough pizza🍕
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