The US has been living on credit cards for decades now. The rest of the world has supported it because the most important thing for everyone is stability. With trade agreements getting ripped up, and nonsense tariffs everywhere, supporting Americas consumption habits is not necessarily in the world’s interests anymore.
Canada alone holds almost $500 billion in US debt. Europe and Japan hold another $2.5 trillion in US debt. America is picking fights with people who can bankrupt them.
Some material bits here - the US can’t run out of dollars so they can repay all of this debt, since it’s denominated in US dollars. The foreign countries can’t force the US to give them dollars in place of the bonds they hold, as far as I’m aware, since those bonds have predefined maturity dates. The US only has to pay their value in dollars as they come due. Which they can always pay. So bankruptcy from foreign debt isn’t on the cards. What foreign countries could do is not buy new US debt with the dollars the US pays them as bonds mature. That would leave the above mentioned dollars in international circulation and therefore devalue the dollar. And that would have implications on what the US can buy from other countries. Arguably this is the intended goal of Bessent and Miran. Although they were hoping to achieve it by getting other countries to appreciate their currencies against the dollar via Bretton Woods-style agreements.
They can certainly issue new dollars to pay them, but if they flood the market with new dollars, the value of the dollar drops, and inflation rises and market loses even more confidence in the value of the dollar.
The value of having a stable economy with stable dollar was ability to issue bonds on that amount. Nobody wants to get Russian ruble bonds atm. That isn’t quite the case for the USA, but the market of buyers has shrunk.
The reduction in value of the dollar relative to other currencies would occur pretty certainly and that’s something some in the Trump admin want because it would make US exports cheaper and therefore they expect it to reduce trade imbalance. Whether the extra dollars result in inflation is an open question. Increasing money supply does not automatically produce inflation. Inflation only results if the economy is at absolute capacity, that’s no more units of goods and services could be produced or rendered. This is rarely the case. In this case we’re taking about new dollars appearing outside of the US. Unless the US cannot export more units of goods and services than they do today, the prices of those goods and services wouldn’t increase as a result of the extra dollars. Instead the extra dollars would allow other countries to buy more goods and services from the US. E.g. more MS Azure cloud contracts, more OpenAI service contracts, more soybean, etc. Whether these countries would do that or decide to just stash the dollars, or burn them, or use them to trade with other countries is an open question.
You are correct. “Bankrupt” is a little strong. But selling existing bonds back into the market while the U.S. is trying to issue new debt would not be great for America. I think dollar devaluation is 100% in the cards.
Yeah that’s a related effect as far as I understand, but it depends on how the domestic debt market reacts, as in whether it absorbs the difference. Also it depends on whether the US government continues the policy of issuing debt when creating dollars. They could just stop doing that. They don’t need debt to finance spending, they’ve just historically done so. That said I don’t know if they’d actually do that since they’re ideologically opposed to this sort of monetary policy.
The us issues many different kinds of bonds some you can’t sell for 6 months at which point you can turn them in for cash at any point or wait forbthem to fully mature
Quite true! Our economy has been held together with duct tape, hope, and the money printer going brrrrr for the better part of two decades now.
People forget that something like the TSA was essentially a jobs program to boost Bush’s weak economy.
I remember working in TV and getting very upset at my coworkers defending Bush and Henry Paulson asking for $700 billion to bail out the banks, telling them that if we didn’t solve these problems the hard way at the time they would grow and fester and become harder and harder to fix without complete disaster. I often wonder if my coworkers recall that conversation the way I do.
The US has been living on credit cards for decades now. The rest of the world has supported it because the most important thing for everyone is stability. With trade agreements getting ripped up, and nonsense tariffs everywhere, supporting Americas consumption habits is not necessarily in the world’s interests anymore.
Canada alone holds almost $500 billion in US debt. Europe and Japan hold another $2.5 trillion in US debt. America is picking fights with people who can bankrupt them.
Some material bits here - the US can’t run out of dollars so they can repay all of this debt, since it’s denominated in US dollars. The foreign countries can’t force the US to give them dollars in place of the bonds they hold, as far as I’m aware, since those bonds have predefined maturity dates. The US only has to pay their value in dollars as they come due. Which they can always pay. So bankruptcy from foreign debt isn’t on the cards. What foreign countries could do is not buy new US debt with the dollars the US pays them as bonds mature. That would leave the above mentioned dollars in international circulation and therefore devalue the dollar. And that would have implications on what the US can buy from other countries. Arguably this is the intended goal of Bessent and Miran. Although they were hoping to achieve it by getting other countries to appreciate their currencies against the dollar via Bretton Woods-style agreements.
They can certainly issue new dollars to pay them, but if they flood the market with new dollars, the value of the dollar drops, and inflation rises and market loses even more confidence in the value of the dollar.
The value of having a stable economy with stable dollar was ability to issue bonds on that amount. Nobody wants to get Russian ruble bonds atm. That isn’t quite the case for the USA, but the market of buyers has shrunk.
The reduction in value of the dollar relative to other currencies would occur pretty certainly and that’s something some in the Trump admin want because it would make US exports cheaper and therefore they expect it to reduce trade imbalance. Whether the extra dollars result in inflation is an open question. Increasing money supply does not automatically produce inflation. Inflation only results if the economy is at absolute capacity, that’s no more units of goods and services could be produced or rendered. This is rarely the case. In this case we’re taking about new dollars appearing outside of the US. Unless the US cannot export more units of goods and services than they do today, the prices of those goods and services wouldn’t increase as a result of the extra dollars. Instead the extra dollars would allow other countries to buy more goods and services from the US. E.g. more MS Azure cloud contracts, more OpenAI service contracts, more soybean, etc. Whether these countries would do that or decide to just stash the dollars, or burn them, or use them to trade with other countries is an open question.
You are correct. “Bankrupt” is a little strong. But selling existing bonds back into the market while the U.S. is trying to issue new debt would not be great for America. I think dollar devaluation is 100% in the cards.
There’s also the issue that the US needs to sell bonds at higher and higher yields just to convince them it’s worth the risk.
As far as I understand it (not an economist), that might lead to a debt spiral.
Yeah that’s a related effect as far as I understand, but it depends on how the domestic debt market reacts, as in whether it absorbs the difference. Also it depends on whether the US government continues the policy of issuing debt when creating dollars. They could just stop doing that. They don’t need debt to finance spending, they’ve just historically done so. That said I don’t know if they’d actually do that since they’re ideologically opposed to this sort of monetary policy.
Depending on the type of bond you absolutely can turn it in for dollars early.
Oh. Is that the kind of bonds the US government issues?
The us issues many different kinds of bonds some you can’t sell for 6 months at which point you can turn them in for cash at any point or wait forbthem to fully mature
Quite true! Our economy has been held together with duct tape, hope, and the money printer going brrrrr for the better part of two decades now.
People forget that something like the TSA was essentially a jobs program to boost Bush’s weak economy.
I remember working in TV and getting very upset at my coworkers defending Bush and Henry Paulson asking for $700 billion to bail out the banks, telling them that if we didn’t solve these problems the hard way at the time they would grow and fester and become harder and harder to fix without complete disaster. I often wonder if my coworkers recall that conversation the way I do.