US Department of Finance's Debt Recovery Operation
On Monday at 2 p.m., the U.S. Department of Finance announced its latest national debt recovery operation, totaling $1.1 billion. This is reported to be the largest single U.S. debt recovery in history. While the Department of Finance has conducted similar operations weekly since April 2020, the scale of this recent operation is unprecedented.
Biden's Stance on National Debt
In early April, President Joe Biden stated that action would be taken if the national debt issue wasn't addressed. He specifically mentioned increasing the return on national debt and expanding it when necessary. The current actions of the U.S. Treasury Department align with these statements.
US Debt Weakness
Despite the strong performance of the U.S. stock market, U.S. debt is currently weakening and approaching its lowest point. The Finance Department's actions appear to be aimed at improving the situation.
Market Sentiment and US Debt
Investors Avoiding Long-Term Debt
Key players in the market, including Ganglake and Pacific Investment Management Company, have publicly stated their preference for short-term U.S. debt over long-term debt. Some have even indicated their intention to avoid U.S. debt altogether. This lack of market support has forced the U.S. Treasury Department to intervene.
Core Logic Behind Bonds
Bonds represent lending money to the government, which then pays interest annually and returns the principal after a set period (e.g., 30 years for a 30-year bond). Bond investments essentially involve buying future cash flows that need to be discounted back to their present value.
Inflation and Bond Prices
Inflation significantly impacts bond prices. As future inflation rises, so does the required rate of return. This increase in the discount rate reduces the present value of future cash flows, leading to a drop in bond prices.
Doubts About Future Purchasing Power
Concerns are growing about the future purchasing power of the U.S. dollar due to rising debt and the potential for Federal Reserve intervention. This is leading investors to question the value of long-term U.S. debt.
Short-Term Debt as a Temporary Solution
While the U.S. Department of Finance is issuing short-term loans (T-bills) to manage current difficulties, this strategy is not sustainable. Short-term debt increases the interest burden and creates pressure to repay capital more frequently. Data suggests that U.S. short-term debt could reach $90,000 in 2025, highlighting the limitations of this approach.
The US Debt Spiral
Increasing Debt and Interest Payments
The core issue is the increasing debt itself. As the U.S. debt continues to grow, the interest payments required will also increase significantly. This creates a negative feedback loop, as the need to pay interest requires issuing more debt.
The Problem of Demand
Even with short-term debt, there needs to be a continuous influx of new investors to take on the debt. Experts like Dario warn that supply and demand imbalances will become a critical issue in the future, irrespective of whether the debt is long-term or short-term.
Parallels to National Bankruptcies
Daniel Dalio's analysis suggests the U.S. government's debt situation is nearing irreversibility, entering a "spiral of death". Higher interest rates necessitate more bond sales to cover interest payments. However, decreasing demand forces the government to offer higher interest rates to attract investors, further deteriorating credit risk.
Warnings Ignored
Jamie Dimon, CEO of Morgan Tatum, has warned about the potential collapse of the U.S. bond market due to excessive spending and quantitative easing. He expressed concern about the lack of action from regulators.
Addressing the US Debt Problem
The Need for Fiscal Responsibility
The fundamental issue is that the U.S. is spending more than it earns, leading to debt accumulation. The solution requires both increasing revenue ("open source") and reducing expenses ("saving money").
Debt Under Different Administrations
Both Democratic and Republican administrations have contributed to the growth of U.S. debt. Data indicates a significant increase in debt under both Bush and Trump, as well as under Obama and Biden.
Criticisms of Spending Bills
Elon Musk has criticized recent large-scale U.S. spending bills, arguing they will lead to further increases in the national debt and potentially bankrupt the U.S. He suggests these bills negate previous efforts to reduce expenses.
The Lack of Long-Term Focus
The current approaches to managing the U.S. debt appear to lack a long-term focus on fiscal responsibility. Ultimately, addressing the U.S. debt problem requires a commitment to increasing revenue and reducing expenses.
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