US Debt Slides, Crisis Deepens, Japan Suffers Heavily
As the U.S. national debt officially surpasses $34 trillion, its creditworthiness further diminishes. U.S. debt not only reflects the economic condition and future prospects of the United States but also foreshadows the overall direction of the global financial market, indicating a further escalation of the crisis.
Japan's substantial increase in U.S. debt has resulted in significant losses, once again proving the correctness of our country's decision-making. Recently, Yellen stated that the U.S. economy has achieved a soft landing. Why is this considered self-deception? So, why has U.S. debt plummeted? What are the underlying issues with the most eye-catching U.S. non-farm data?
In the recent period, we have observed that after two months of continuous increase, the price of U.S. Treasury bonds has reversed and re-entered a state of decline.
This has caused considerable concern among investors who closely monitor the dynamics in this field, especially those countries that have steadily increased their holdings of U.S. debt, with Japan being particularly noteworthy.
Japan is currently the largest holder of U.S. debt. Unlike China, Japan chose to increase its holdings in the most recent period, and from the current perspective, Japan has suffered significant losses.
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According to public information, from late October of this year until the end of December last year, the U.S. Treasury bond market showed a relatively significant upward trend amidst fluctuations.
The yield on 10-year U.S. debt also dropped to a level of 3.7%, which is more than a 20% decrease from the previous 5%, causing substantial losses for Japan, which had purchased.
This phenomenon has left many investors deeply puzzled and has sparked more speculation and questioning about the future trend of the market.
So, let's first look at why U.S. debt has plummeted?Isn't it said that for a soft landing, long-term U.S. Treasury bonds should not rise?
In fact, the direct reason for the rise in U.S. Treasury bond prices is the dovish stance of the Federal Reserve, which is to pause interest rate hikes, and there may be a potential for entering a rate-cutting cycle in the future.
After the last Federal Reserve meeting, the market expected that the Fed might start cutting interest rates in March this year, with the possibility of up to five rate cuts by 2024.
However, the latest meeting minutes indicate that the Fed's expectations may change, meaning that the arrival of the rate-cutting cycle is far from imminent.
So why has the Fed's attitude changed so quickly?
There are probably three reasons for this:
First, the latest U.S. non-farm data exceeded expectations. Data released by the U.S. Bureau of Labor Statistics showed that the U.S. non-farm employment population increased by 216,000 in December 2023, not only far higher than the widely expected 171,000, but also almost higher than all analysts' expectations.
Second, after this data was announced, Yellen immediately declared a soft landing for the U.S. economy. He also stated that while curbing high inflation, the U.S. employment situation and wage increases exceeded expectations.
Yellen is not only the current U.S. Treasury Secretary but has also served as the Chairman of the Federal Reserve, so his words will definitely influence the Fed's crowd, including Powell.
Third, 2024 is before the U.S. election, and currently, Biden and Trump have already started their competition. Historical records show that the Federal Reserve is rarely influenced by the U.S. authorities.For instance, Powell was nominated by Trump, but after taking office, Powell went against Trump's wishes and began to raise interest rates, leading to Trump's harsh criticism of the Federal Reserve being a bigger problem than China.
However, Powell may have privately reached some kind of agreement with Biden to lower interest rates in exchange for reappointment. Therefore, from this perspective, the future trend of the U.S. election will play a decisive role in whether the Federal Reserve will lower interest rates.
So, under such circumstances, the show must go on. Since the data supports it and the economy is strong, let's temporarily hold off on lowering interest rates!
But this is clearly a paradox, because the U.S. has just announced that the debt ceiling has exceeded 34 trillion. It's like a person who earns 200,000 a year but spends 250,000, with a debt of 2.5 million, and still claims to be developing strongly. Who would believe that?
So, what is the root cause of the decline in U.S. debt?
U.S. debt has entered a downward channel again. The previous rise was, of course, an advance reaction to the interest rate cut, and now that it has been postponed, it will continue to fall.
This is only the surface reason.
What is the deeper reason?
The most important, of course, is the rampant growth of the U.S. debt ceiling, which also reflects the decline in U.S. debt credit.
The U.S. debt balance has already broken through the 34 trillion mark, which is a staggering figure.What is more concerning is that this number is growing at an alarming rate, with its scale and impact gradually expanding.
This phenomenon has sparked market concerns about the possibility of U.S. debt default, becoming the fundamental factor driving U.S. Treasury yields.
The increase in default risk has directly led to a decline in U.S. Treasury prices and a rise in yields.
As investors' confidence in U.S. debt wanes, they begin to demand higher returns on bonds to compensate for potential risks.
This further exacerbates the upward trend in U.S. Treasury yields, creating a vicious cycle.
The sustained high levels of U.S. Treasury yields have had a negative impact on the U.S. economy.
High yields mean increased borrowing costs, which for businesses means greater difficulty in expanding production and investment.
In addition, high yields can also lead to increased borrowing costs for consumers, further suppressing consumer demand.
Once again, there is a deterioration in the U.S. business environment. In the latest data from international rating agencies, in the fourth quarter of 2023, the vacancy rate for office buildings in major U.S. cities reached a staggering 19.6%.
This means that one out of every five office spaces is vacant.This phenomenon forms a stark contrast with the rise in U.S. Treasury yields, further highlighting the difficulties faced by the U.S. economy.
Apart from these two important reasons, let's primarily examine the non-farm data of the United States. Some might say, you mention that the U.S. is heavily indebted and controlled by the office.
Why is the U.S. non-farm data so high? What's the catch?
In December, the non-farm population increased by 216,000, which is much higher than the expected 171,000. However, there is an important data point: the U.S. government sector added 52,000 new jobs.
What does this mean? It means that excluding government jobs, the economy is actually shrinking. The problem the U.S. is facing now is fiscal deficits and debt ceilings. Such employment will exacerbate the fiscal crisis of the U.S. authorities.
In the short term, the data seems to be improving, but in reality, it's like drinking poison to quench thirst. In the long term, it not only has no benefits but also worsens the U.S. condition.
In addition, healthcare added 38,000 jobs, while the manufacturing industry, as a barometer of employment, only created 17,000 jobs.
Not only that, but another manufacturing barometer, the warehousing and transportation industry, not only did not increase employment but actually reduced 23,000 jobs.
This indicates that the U.S. manufacturing industry is also facing huge problems, and the increase in government jobs also suggests that the pressure on the U.S. fiscal department will further increase.
Therefore, Yellen's talk of a soft landing and the non-farm employment data released by the U.S. should be questioned with a big question mark?The fundamental reason for the continuous decline in U.S. Treasury bonds lies in the default risk of these bonds. This risk not only affects the U.S. government bond market but also has a profound impact on the entire U.S. economy.
To address this issue, it is necessary to tackle it at its root by reducing government spending, accepting the rise of emerging countries, and taking effective measures to reduce the default risk and stabilize market confidence.
Only in this way can we avoid a greater impact of the U.S. debt crisis on the global economy and prevent a collapse during the transition to the world's top position.
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