Why Being a Reserve Currency Might Actually Be Holding the US Back
Could losing Reserve Currency Status possibly be the best thing for the US economy?
Evidently, the United States is on the verge of financial collapse once more. In order to pay for things like infrastructure, roads, bridges, social and retirement programmes, we have amassed a significant amount of debt throughout the course of the United States’ lengthy history.
Now, the US pays for all of those things by collecting taxes, and ideally, a government should spend less than it makes, somewhat like a business.
And, a nation must run a deficit if its spending exceeds its revenue.
The US is borrowing more money because it is spending more than it is earning. For example, the budget deficit this year so far is 96% higher than it was the previous year. And one major factor in that is the incredibly high interest rates, which are hurting both the middle class and the US debt in addition to the middle class.
The overall national debt now stands at $31.4 trillion after spending more than 430 billion dollars this year than we did last year. Consequently, the debt ceiling has been reached.
A trillion dollars is equivalent to one million millions or one thousand billions, to give you an idea of the size of the amount. To illustrate how big a billion really is, consider that it would take you 31 years to count nonstop from 0 to 1 billion. On the other hand, it would take you more than 30,000 years to count all the way from 0 to 1 trillion. Only one trillion are included in that.
And that’s the issue, as it’s predicted that the US will accrue a debt of $50 trillion over the next ten years.
In this blog I want to help clarify what exactly this means, to whom the US owes all of this money, and what this means for middle-class Americans, investors, and savers. So let’s get started.
Right now, as a nation, we owe more than 31 trillion dollars. So let’s contrast that with our income, or GDP. because the U.S. debt to GDP exceeded 100% after 2012.
That being said, let’s imagine for a moment that the government could suddenly raise taxes to 100 for each and every person by snapping its fingers. This implies that you were required to repay the government a portion of every dollar you earned.
Let’s further assume that there was no national debt at that time.
The US government would have exactly one year to pay off its outstanding national debt at that time. Which makes sense. However, when that number rises above 100, as it is at this time, it indicates that we are spending more than we are able to collect, which theoretically means that we will never be able to pay off the debt because it will continue to increase much more quickly than we can do so.
And over time, that slows economic growth because as debt increases and interest rates rise, as they are right now, more of our payments must go towards interest-only payments, leaving less money for everything else, such as retirement, social security, and, of course, defence.
For instance, the US will have to fork over about 900 billion dollars in interest payments alone in 2023. For context, the total defence budget for the United States in 2022 was approximately 1.1 trillion dollars, of which 765.8 billion were allocated to the armed forces.
We will therefore spend more on interest on our debt this year than we will on the entire military budget.
That represents approximately 8.5 percent or one-tenth of all US spending. That presents a challenge.
So, unfortunately, that is the predicament we find ourselves in.
And this is how it happened.
The US Treasury is in charge of managing our debt; Congress and the president decide tax rates, but it is the US Treasury that controls the funds used to cover costs such as Social Security and Medicare, which are the two areas with the highest expenditures, followed by Medicaid, the military, the Department of Education, and a few other categories.
When the US lacks the funds to cover those expenses, it must borrow money, aka run a deficit.
Since we never repay our debts because we keep borrowing, you can think of the total national debt as an accumulation of all the deficits that we’ve accumulated over the years.
So, who does the United States borrow money from?
Technically, both you and the question have the answer. The US issues treasury bonds, which are then purchased by investors, as a means of borrowing money.
Now, the government pays us interest in return for our investments in treasury bonds, and when the bonds mature, we receive all of our money back along with the interest that was paid to us.
By the way, the most popular security in the world is U.S. treasury bonds. Here is a list of the people who own those securities, also known as our debt.
The general public, which includes foreign nations and investors, holds about 75% of all U.S. debt.
It may surprise you to learn that Japan, not China, is the largest foreign investor in our debt. Following are the UK, Belgium, and Luxembourg, then China.
Now, those foreign investments, or the money the United States owes all those other nations, only account for 7.3 trillion dollars, or about 24% of the total debt.
The Federal Reserve is the single largest holder of all U.S. debt, and the United States owes the majority of its debt to itself.
They hold about a fifth of all the debt, and this enables the Federal Reserve to implement monetary policy through actions like quantitative easing, which uses the infinite money glitch to stimulate the economy, and quantitative tightening, which involves selling off their balance sheet to tighten the economy and slow it down, as we are currently doing. However, that is not the issue.
It doesn’t matter to whom we owe the money. The debt ceiling is the cause of the issue, which is a problem we created for ourselves.
The total sum of money that Congress set as a cap on the amount the United States can borrow by issuing new treasury bonds is known as the debt ceiling.
Now, if the US can’t pay its foreign investors, its bondholders, and itself, then the US could default on its debt, which has never happened, but we came dangerously close in 2011.
Additionally, the U.S. credit rating was cut, which resulted in a 15% decline in the stock market.
Similar to individuals and businesses, nations also have credit ratings, and the lower the rating, the more expensive it is for those nations to borrow money.
Because of this, they must charge their investors a higher interest rate to make up for the increased risk, but this results in increased debt and even worse news.
Because of this, Janet Yellen, the head of the US Treasury, is taking “extraordinary measures” to prevent it from happening.
But since they are divided and unable to agree to raise the debt ceiling, it is only natural that it will be used as a political football. As has frequently occurred throughout our history, they will probably ask one another for a compromise of some kind.
This typically involves the Democratic Party arguing that the budgets for those programmes have already been approved; now it’s just a matter of paying for the things that were already agreed upon, while the Republican Party asking the government to spend less money and to cut certain programmes it believes are not necessary.
However, the drawback to all of this is that the middle class ultimately bears the cost of our politicians’ arguments.
There have been numerous discussions over the years about how to approach this issue, but according to Janet Yellen, the head of the US Treasury, we should just come to an agreement to raise the debt ceiling.
That, in my opinion, is the only way to deal with the debt ceiling.
But others have suggested that we could theoretically mint a platinum one trillion dollar coin if the government can’t agree on a deadline to raise the debt ceiling
That’s correct. In theory, Janet Yellen could direct the mint, a division of the US Treasury, to produce a coin worth a trillion dollars that would then be deposited in the Federal Reserve. Salary, Social Security, and other benefits would then be paid with this money.
Technically, that money would never be used in transactions, preventing runaway inflation, especially if it’s carried out responsibly.
Now, those who are in favour of the idea claim that this is much preferable to defaulting on our debt, having our credit rating reduced, and possibly losing our status as a World Reserve currency over night.
The opponents of the idea claim that if everyone saw what a mess the entire US financial system is, they would all decide to sell their bonds.
They would all be dumped, interest rates would soar, and as a result, the US would enter a protracted legal proceeding in which the government would sue itself in an effort to determine whether that had even been permitted to occur in the first place.
And even worse things would occur if it turned out that it wasn’t permitted.
The point is that it would be a difficult process that is unlikely to ever take place, and even Janet Yellen, who has the authority to make it happen, has stated that she opposes the trillion-dollar coin idea.
In the end, this means that Congress will need to put their heads together and resolve this issue as soon as possible because it is still unclear whether or not we will ever be able to pay off the nation’s debt.
The answer is technically no, but it is possible that we could pay off the debt, although it is likely that we won’t. And the reason for this is that borrowing money is okay as long as the US can reinvest the funds to boost its own GDP.
That’s a good thing, just like it’s a good idea to borrow money to further your education in order to earn more money.
The issue arises if your interest rate climbs too high and starts to outpace your income. The issue with being responsible is that it often means raising taxes, which will also irritate some people, or cutting spending somewhere, which will enrage someone. And because doing so would put their chances of winning reelection in jeopardy, neither political party wants to get involved or take responsibility.
Even economists are uncertain as to whether there is a national debt Tipping Point.
Because of the national debt, there have been numerous predictions over the years that the US economy would collapse and enter a recession, but somehow we have continued to borrow.
The truth is that there probably is a limit somewhere, and that’s particularly true if the US loses its position as the world’s reserve currency and is unable to export dollars due to export inflation because if we do that, more dollars will stay in the country.
This results in higher interest rates to combat inflation, which results in higher inflation, higher unemployment, and slower economic growth.
The truth is that we will eventually need to take responsibility, but in the meantime, keep working on your own investment journey. I wish you a wonderful remainder of your day.
