"US Deficit Hits $217B! Debt Crisis Looms"

Last night, the United States released economic data for the third quarter, with the current account deficit reaching $217.1 billion.

However, this is slightly less than the market's expected $222 billion and a significant narrowing from the previous quarter's $251.1 billion.

Faced with the deficit, the United States may issue debt again. What would happen if U.S. debt breaks the limit?

01, The deficit keeps increasing

In fact, since the outbreak of the COVID-19 pandemic in 2020, the United States' current account deficit has been growing continuously. The year with the fastest year-on-year growth should be 2020, which increased by 34.8% compared to the year before the pandemic.

The growth rate in the past two years has slightly declined, but it is still growing, and the proportion of the current account deficit in GDP has also been increasing year by year.

This should be greatly related to the continuous rise in the United States' trade deficit.

From the second half of last year to now, due to energy prices being much higher than in 2021 and 2020, the United States, as a major energy exporter, can create a lot of export revenue, suppressing the trade deficit. However, despite this, the United States still maintains a large trade deficit.

Advertisement

The trade deficit in October reached nearly $80 billion, with the deficit in goods even reaching as high as $99 billion.

Of course, in the view of the United States, these issues are not too big, because as a reserve currency, the U.S. dollar can continue to issue debt to deal with expenditures.02, U.S. Debt in Crisis

However, in reality, the difficulty for the United States to issue debt is increasing, as global sellers are urgently selling off U.S. debt.

In the capital flow data released by the U.S. Department of the Treasury, $115 billion in U.S. debt was sold off by foreign investors, and this is just the reduction in October this year. Currently, the cumulative balance of U.S. debt held by foreign investors is $7.185 trillion, dropping to the lowest record since May last year.

In October this year, Japan, the largest foreign creditor of the United States, became the largest seller of U.S. debt, and China also sold $24 billion. The United Kingdom, which had previously increased its holdings, also turned to selling.

Although some countries are buying, including France and Canada, the amount bought is far less than the amount sold.

Since the second half of the year, the liquidity problem of U.S. debt has become increasingly serious, and has gradually evolved into a crisis.

The selling tide has been ongoing. Although the yield on U.S. debt has fallen significantly during this period, the enthusiasm of buyers has always been low.

Foreign institutional investors have been selling. Although there must be buyers when there are sellers, the buyers are mainly domestic and individual investors in the United States. It is possible that these retail investors will become the ones to take over the plate.

The scale of active selling is far greater than the scale of active buying, causing the overall price of U.S. debt to fall by more than 12% compared to the beginning of the year.

The recent scale of the Federal Reserve's balance sheet reduction is very close to the planned $95 billion per month, showing that the Federal Reserve is also sparing no effort in selling U.S. debt. As the largest buyer, it reduces U.S. debt under the guise of reducing the balance sheet, causing the power of the selling side to be far greater than that of the buying side.U.S. Treasury Secretary Janet Yellen warned that if the liquidity crisis continues to deepen, the U.S. Treasury bond market may collapse, leading to a full-blown financial storm.

As a result, she had to state that if necessary, the Treasury Department would repurchase U.S. debt in the market.

In this situation, it is becoming increasingly difficult to issue new bonds.