The size of the US national debt has exceeded 35 trillion US dollars, exceeding 120% of its GDP. China is the second largest overseas holder of US debt, holding 771 billion US dollars of US debt. If China suddenly sells off all US debt, what impact will it have on the US economy? Can this move directly defeat the US economy?
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Recently, the US national debt has made headlines again. On July 31, 2024, the size of the US national debt exceeded the $35 trillion mark. This number sounds dizzying, how big is it? A simple calculation is equivalent to every American carrying a debt of $100,000. What's more exaggerated is that this debt even exceeds 120% of the US's own annual economic output. In other words, even if Americans don't eat or drink for a whole year and use all their money to pay off their debts, they still can't pay off this huge debt.
The US government has been spending lavishly in recent years. In order to stimulate the economy and deal with various crises, it can be said that it has borrowed money like water. From infrastructure construction such as building bridges and roads to social welfare for ordinary people and military spending, money is needed everywhere. But the problem is, what should I do if my wallet is not full enough? Then borrow from the whole world!
As a result, global investors, governments, and large companies have all become the "creditors" of the United States. The United States is like a rich second-generation who spends money like water. When borrowing money, it is generous and generous, but when it comes to paying back the money, it starts to have difficulties.
Although the United States is the world's largest economy, it has a strong financial system and international status, and the US dollar is a global hard currency. These advantages give the United States the ability to "print money to pay off debts." To put it bluntly, it is to ease debt pressure by adjusting monetary policy, such as interest rate cuts and quantitative easing. But this approach is not without cost. In the long run, it is likely to cause inflation and even affect the stability of the global economy.
So why do U.S. Treasury bonds continue to attract investors? Mainly because everyone thinks that U.S. Treasury bonds are a relatively safe investment. After all, the U.S.'s economic strength and credit are among the best in the world, and everyone thinks that the U.S. cannot default on its debts. However, as the debt scale continues to grow, this trust is also being tested. If investors begin to doubt the U.S.'s ability to repay its debts and sell off their Treasury bonds, the U.S. will have a headache.
If the United States has problems with its international credit, its voice and influence in the international arena will be greatly reduced. Now, the U.S. debt problem has had a significant impact on the United States. In order to repay the debt, the government has to find ways to increase revenue, and the most direct way is to increase taxes. Once taxes are increased, the economic pressure on the American people will increase. Whether it is wage tax, consumption tax or other taxes, they are likely to increase.
In addition, the government may also cut some social welfare expenditures, such as Medicaid, food stamps, and housing subsidies. For low-income families in the United States, these benefits are an important guarantee for their lives. Once they are reduced, their lives will be difficult, and even basic living may become a problem.
What's worse is that the US is already experiencing inflation and the market is becoming unstable. Companies are starting to cut back on investment, lay off employees or cut back on spending. If the US unemployment rate rises on a large scale, it will have a huge impact on US society.
Under such circumstances, countries have begun to doubt US debt. China is now the second largest overseas holder of US debt. According to reports, in April 2024, China held US debts as high as $771 billion.
Faced with this situation, many people are thinking, the United States has been fighting an economic war with China, trying to sanction China's economic development, so what will happen if China sells all of its U.S. debt?
Although China's holdings of US$771 billion in US debt only account for about 2% of the US's huge US$35 trillion national debt, this 2% is not a small amount. In the international financial market, it is a "big fish" that can stir up a lot of waves.
If China suddenly announced that it would sell all its US debt, the supply of US debt in the market would suddenly increase. In this case, the price of US debt would likely fall directly. The yield on US debt would probably rise because investors would have to increase the rate of return in order to attract buyers. But this is not a good thing for the US government because their borrowing costs would suddenly go up, and they would have to pay more interest every year.
Not only that, the global economy will also have a chain reaction. You know, U.S. debt is one of the important cornerstones of the global financial market, and one move can affect the whole body. Other markets will also be affected, and the currencies of other countries may fluctuate as a result. At this time, investors may panic and look for safe havens, and the global trade order may be messed up.
The most dangerous is the United States itself. The United States is the world's largest economy. If its financial market is turbulent, it will have a huge impact on the entire economy. Corporate financing costs will rise, investment may decrease, and the driving force for economic growth may be insufficient. More importantly, the credibility of the US government will also be questioned, and it may be more difficult to borrow money in the future.
However, this is not a good thing for China. Although selling US debt can bring a lot of US dollar cash, the risk of US dollar depreciation also comes with it. China is the world's largest foreign exchange reserve country and holds a lot of US assets. Once the US dollar falls, we will also be greatly affected.
Therefore, it is much better for China to hold on to US debts and not sell them than to sell them all. Holding a large amount of US debts has become a means of economic diplomacy for China. China holds a considerable amount of US debts, which is like having a "trump card" in its hand that can play a role at a critical moment.
Moreover, "de-dollarization" is now popular all over the world. Compared with selling off U.S. debt, de-dollarization is the biggest blow to the U.S. economy. In recent years, the United States has frequently used the hegemony of the dollar to carry out economic "harvests" from countries around the world one after another.
Whenever the U.S. economy encounters difficulties or wants to stimulate its own economic growth, the Federal Reserve starts printing money and pours money into the market through policies such as quantitative easing. In this way, the supply of U.S. dollars increases, interest rates fall, and money becomes easier to borrow. American companies and people can more easily obtain funds for investment and consumption, and the economy naturally becomes active.
However, a lot of the dollars printed by the United States flowed to other countries, especially those with relatively fragile economies and insufficient foreign exchange reserves. When these countries saw that the dollar was cheap, they borrowed money for investment, consumption, and even used it to repay foreign debts. As a result, the US economy temporarily recovered, but the economies of these countries accumulated a large amount of dollar debt.
When the US economy recovers, the Fed will raise interest rates again. This rate hike is a major blow to the entire world. As soon as international capital saw that the US interest rate was high, they withdrew their capital from other countries and returned to the US to earn higher interest income.
From the "lost decade" in Latin America to the financial crisis in Southeast Asia and the recent economic turmoil in Argentina, Turkey and other countries, the shadow of the United States can be seen behind them. Through repeated economic "harvesting", the United States has not only transferred its own economic pressure, but also grabbed a lot of wealth from other countries.
Therefore, countries are now dissatisfied with the hegemony of the US dollar and have joined the process of de-dollarization. According to Russian media reports, as of July 19, 2024, nearly half of the countries in the world have begun to "de-dollarize".
The first to step forward were the emerging economies, who saw the injustices and hidden dangers behind the dollar's hegemony and decided to fight for more economic autonomy for themselves. Take China as an example. As one of the world's largest exporters, China is also gradually promoting the internationalization of the RMB.
The BRICS countries have joined together to develop a new financial settlement system that will bypass the traditional financial telecommunications alliance of the global banking industry and reduce dependence on the US dollar.
Some traditional developed countries have also begun to have doubts about the US dollar, so they have also begun to follow China in de-dollarization. However, de-dollarization is not an easy task. After all, the position of the US dollar in the global economy is deeply rooted, and it is not easy to completely get rid of its influence. However, judging from the current trend, the wave of "de-dollarization" is unstoppable.
In this process, China plays a pivotal role. As the world's largest developing country and a representative of emerging economies, China has a strong influence. It can be said that every step China takes may affect the direction of the global economic landscape.
Hot comments from netizens:
One netizen said: "The United States is playing with fire! Borrowing money is like running water, and one day it will not be able to pay it back."
Another netizen joked: "The United States is trying to turn the entire world into its creditor. This is a very cruel move."
Some netizens expressed concerns about China's large holdings of U.S. debt: "Our country has accumulated foreign exchange reserves for so many years. If the United States really can't pay back the money, wouldn't it be a big loss?"
Some people hold a different view: "In fact, China's holding of so much U.S. debt is also a manifestation of its strength, and it can take the initiative in international negotiations."
Many netizens expressed their support for the trend of "de-dollarization": "It is time to get rid of the dollar hegemony. Why can the United States print money whenever it wants? In the end, we developing countries will suffer."
A netizen who majored in economics analyzed: "De-dollarization is an inevitable trend, but this process will not happen overnight. It requires the joint efforts of all countries to establish a new international financial order."
Some netizens also expressed their concerns: "De-dollarization sounds good, but will ordinary people like us be affected?"
In response, someone said: "There may be some fluctuations in the short term, but in the long run, getting rid of the dollar hegemony will do us more good than harm."
One netizen said: "Whether it's US dollars or RMB, I only care whether I have enough money in my pocket to spend."
Some people also joked: "The United States owes so much money, it would be great if I could pay off my Huabei as well."
Faced with the complex international financial situation, some netizens called for: "We should still pay more attention to international news and improve our financial literacy so that we can better cope with future economic changes."
Others said: "Instead of worrying about these things, it is better to work hard and improve your competitiveness. This is the most reliable thing."
Regarding China's role in the international economy, one netizen proudly said: "I feel very proud to see that our country has more and more say in the international arena."
Some people also reminded: "With great power comes great responsibility. I hope our country can speak more for developing countries on the international stage."
Faced with the complicated international situation, netizens have a wide variety of opinions. There are concerns, expectations, ridicule, and deep thoughts. These comments reflect the ordinary people's attention and thinking about the international economic situation. Although everyone has a different perspective, their expectations for national development are the same.
In this era of information explosion, we need to remain rational and objective. Faced with the complex international economic situation, we must not only pay attention to international trends, but also be down-to-earth and do our own work well. After all, the strength of a country is inseparable from the efforts of everyone, and the development of everyone is inseparable from the prosperity of the country. Let us look forward to China playing a greater role on the future international economic stage and contributing more to the development of the world economy.