Author: SanTi Xiaotangge & Nashida
In the financial world, the U.S. Treasury bond interest rate has always been used as the risk-free rate R0 in various textbooks such as CFA for value calculation and future valuation, etc., especially in the eyes of elites with financial system education, this is almost equal to zero risk. But what will happen if this risk-free parameter becomes a risk? If the U.S. Treasury defaults, it will have a profound impact on the global economy and financial markets.
The following is an analysis from the perspectives of liquidity, dollar value, and Bitcoin value:
1. Liquidity: U.S. Treasury bonds are regarded as safe assets by the world and are the cornerstone of the global financial system. Many countries, institutions and individuals hold a large amount of U.S. Treasury bonds. If the United States defaults, it will trigger a crisis of confidence in U.S. Treasury bonds in the market, which may lead to a large-scale sell-off of U.S. Treasury bonds, thus triggering a liquidity crisis. The depletion of liquidity will lead to a sharp drop in asset prices (selling assets in exchange for cash flow), increase volatility in financial markets, and further aggravate the global financial crisis.
2. Value of the US dollar: The US dollar is the world's most important reserve currency. Although the international status of the RMB is rising, the volume of US dollar settlement is still far ahead. The default of US Treasury bonds will weaken the world's trust in the US dollar, leading to a decline in the value of the US dollar. However, if the market panics and investors sell assets, the demand for US dollars will increase, while another part may flock to other assets that are considered "safe havens", such as gold or other strong currencies, which may have a certain buffering effect on the depreciation of the US dollar.
3. Bitcoin value: The secondary market value of Bitcoin is objectively affected by many factors, including but not limited to: market sentiment, consensus, popularity of BRC standards, attitudes of governments of different countries, regulatory policies, technological development, application popularity and convenience, etc. In the event of a default in the United States, Bitcoin may have two completely different reactions.
● On the one hand, if investors seek non-traditional (gold, silver) "safe haven" assets, and if the world needs new easing reservoirs to absorb decompression funds, it may have a relatively positive impact on the demand and value of Bitcoin in the medium and long term. Multiple discussions on digital assets such as Bitcoin may accelerate between countries and within countries.
● On the other hand, because the value of Bitcoin is highly volatile and risky, if there is a panic in the market, investors may withdraw funds from high-risk assets such as Bitcoin, causing the value of Bitcoin to fall. Therefore, Bitcoin's response may depend on market sentiment and investors' risk preferences.
● Personally, I believe that if a financial crisis is caused by a default, there will most likely be fluctuations in the short term due to cash flow cashing out for survival and company operations, and then new adjustments will be made after the market stabilizes and becomes relatively calm.
4. Impact on the global economy and trade: U.S. debt is regarded as the safest asset in the world, and the U.S. dollar is the world's main settlement currency. If a default occurs, it may cause the global economy to fall into recession or a deeper economic crisis. At the same time, a default on U.S. debt may damage the credit of the U.S. dollar and affect global trade. Countries exporting to the United States may face a reduction in orders, and countries importing U.S. goods and services may have to pay higher prices. Governments and central banks may take emergency measures, such as interest rate cuts and quantitative easing, to stabilize financial markets and the economy.
5. Reshaping the global financial system: If the United States defaults, it may trigger a reconsideration of the current global financial system based on the US dollar. Other currencies, especially the RMB, may play a larger and more important role in the future global financial system. However, my country is also experiencing the test of real estate and debt. If it can safely survive this crisis, the internationalization of the RMB will be further broadened, and its position in the settlement system will be further consolidated. In addition, this may accelerate the global acceptance of digital currency and blockchain technology, which may change the global financial landscape.
6. Fluctuations in the value of risky assets: In the event of a U.S. debt default, the value of risky assets (such as stocks, commodities, digital currencies, emerging market assets, etc.) may fluctuate significantly. Risk-averse investors may withdraw funds from these markets, causing prices to fall. Investors seeking high returns may take this opportunity to enter the market, causing prices to rebound.
Theoretically, the following three situations may lead to a US Treasury default:
Debt ceiling: The borrowing of the U.S. government is controlled by the debt ceiling set by Congress. If Congress fails to raise this ceiling in a timely manner, the U.S. Treasury may not be able to issue more bonds to pay the interest and principal of the national debt, which may lead to a default. The United States is also currently facing the risk of a debt ceiling, and will face the issue of debt ceiling decision-making around Q3 2023. However, in history, although the dispute over the debt ceiling often caused disputes in Congress, Congress always passed the bill to raise the debt ceiling in a timely manner to avoid default.
Government Shutdown: If the U.S. government shuts down because of a budget dispute, it could affect the government's debt payments. However, even in a shutdown, the U.S. Treasury can usually find ways to pay its debts. For example, the Treasury might use "extraordinary measures," including temporarily halting certain investments or cashing out certain assets, to maintain the government's cash flow and avoid default.
Policy Errors: Policy errors, such as excessive fiscal tightening or excessive monetary tightening, could cause a U.S. recession, which would affect the government's ability to service its debts. However, given the U.S. policymaking process and historical experience, the likelihood of this happening is quite low. However, given the size and depth of the U.S. economy, and the Fed's monetary policy tools (such as quantitative easing), the likelihood of this happening is quite low.
Extreme black swans, leading to the possibility of default:
External shocks: Extreme external shocks, such as large-scale natural disasters, solar storms that destroy communications, wars, or epidemics, could wreak havoc on the U.S. economy and affect the U.S. government's ability to repay its debts. However, in this case, the U.S. government may still be able to avoid default by issuing more debt, raising taxes, or cutting spending.
Political Conflict: Severe political conflict, such as civil war or sudden change of government, could cause the U.S. government to be unable to function normally, thus affecting debt payments. However, given the U.S. political system and historical experience, the likelihood of this happening is also very low.
summary:
1. Although the possibility of a US default is very small, if it does happen, it will have a major impact on the global financial system. A US debt default will have a profound impact on global financial markets, the economy, and trade.
2. The U.S. government and the Federal Reserve have had multiple tools at their disposal to avoid default when they have faced similar problems before (such as rate cuts, quantitative easing, raising the debt ceiling, etc.). Even in the event of a government shutdown or a dispute over the debt ceiling, the U.S. government has always found a way to avoid default.
3. The impact of the default of US debt on emerging digital industries such as blockchain may be a situation of rising before falling, because the consensus is not yet fully universal. When facing risks, especially liquidity risks, although BTC has a short-term hedging effect before banking crises, when facing national debt-level risks, it involves more corporate cash flow and may be subject to liquidity constraints like other risky assets in the short term, resulting in a negative trend.
However, in the long run, once interest rate cuts and QE are resumed or when people calm down and think about new assets that represent the future AI and digital age, it will be a brand new opportunity for assets such as Bitcoin. If the settlement currency of the US dollar is hit, some companies and individuals may consider using Bitcoin or other cryptocurrencies for cross-border payments in addition to considering other legal currencies such as the RMB for settlement. If this trend develops, it may push up the demand for Bitcoin and accelerate the transformation of global trade methods.
In summary, I personally believe that if the US debt really defaults, it will have a very serious impact on the global economy, but it may be a nirvana effect for emerging fields such as blockchain, Bitcoin, and AI, and may open up a new world. It is a very game-like state, and the short-term and long-term rhythms may be completely different, but I still hope that this black swan event of a superpower like the United States not defaulting on its national debt will not happen.
However, the probability of similar effect events of the same level occurring is actually not low, but the specific time and suddenness of their occurrence are difficult to estimate, so we must have a good risk control defense mechanism to be prepared.
Only when winter comes do we realize that pine and cypress are the last to wither.
PS: All the above views are only for long-term thinking and communication and learning, and do not constitute investment advice.
