Geopolitical risks could hasten a debt crisis.
Commentary
Many investors are sounding the alarm about a looming debt crisis, but governments seem to be turning a blind eye to the warning signs.
In times of inflationary crisis, it is crucial for the government to cut back on spending to curb rising prices and prepare for higher borrowing costs. However, the Biden administration is disregarding all the signals and continuing to borrow at an unprecedented pace.
Debt crises occur when even the most conservative investors refuse to add to a portfolio of government bonds that are already losing value. Central banks may step in to buy these unwanted bonds, but this only exacerbates the inflation problem and leads to losses for the central bank.
The monetary and fiscal recklessness of 2020 has created an enormous problem that is difficult to solve. Central banks are already reporting losses on their assets, and taxpayers will ultimately have to cover these negative results.
Government bonds have been a disastrous investment in 2022 and continue to yield negative returns in 2023. Meanwhile, sovereign debt is skyrocketing at an alarming rate, disregarding the impending wave of bond maturities in the global fixed-income market in 2024 and 2025.
The U.S. national debt has surged by $550 billion in less than a month, reaching $33.5 trillion in just four months. This surge coincides with a rise in the 10-year Treasury yield from 3.7 percent to 4.6 percent. It is concerning to see a government rapidly increasing its debt while facing a $500 billion maturity wall in 2025 and $7.6 trillion in public debt maturities within the next year, as reported by Goldman Sachs. Additionally, data from the Commodity Futures Trading Commission reveals that U.S. Treasury net long positions in two-year and 10-year notes are at their lowest level since October 2018, adding to the dangerous scenario amidst escalating geopolitical tensions.
The U.S. government is banking on growing global demand for U.S. dollars to offset its fiscal imbalances, as well as relying on the Federal Reserve to adjust its monetary policy if necessary. However, this is a risky bet considering that China, Saudi Arabia, and other nations are reducing their holdings of U.S. Treasuries to multiyear lows. It is imprudent to assume that the world will absorb the United States’ fiscal imbalances at any cost during a global geopolitical conflict. Furthermore, it is reckless to believe that the Federal Reserve will be able to purchase all the necessary Treasury bonds when it is already operating at a loss. Such irresponsibility could potentially jeopardize the long-term stability of the U.S. dollar.
The fiscal imbalances of the United States are not unique; many other developed nations are also grappling with high deficit levels and facing rising rates, central bank losses, and impending maturity walls, particularly in the eurozone.
All of this points to a process of monetary debasement that began in 2009 but accelerated in 2020. Governments are devaluing their currencies to mask their massive debts and deficits, eroding the savings and wages of their citizens. In such an environment, sovereign bonds offer little protection for investors.
Governments are unwilling to bear the consequences of the risks they take and instead pass on the burden to others through negative real rates or losses in bond prices. The inflationary spiral is likely to persist, and the possibility of another round of quantitative easing will not be enough to offset the accumulated losses in bond portfolios or alter the scenario of currency debasement.
In times like these, gold emerges as an incredibly attractive asset. It is relatively inexpensive compared to its historical purchasing power and monetary qualities, especially when compared to fiat currencies that are being devalued through excessive printing. Given the current debt problem and geopolitical risks, gold is a safe bet in a volatile world.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
How does the Biden administration’s focus on aggressive fiscal stimulus and social spending programs impact the long-term sustainability of the national debt?
Dollars and diversifying their reserves. If global demand for U.S. dollars declines, the government’s plan could backfire, leading to a sharp depreciation of the currency and further exacerbating the debt crisis.
Furthermore, the Biden administration’s focus on aggressive fiscal stimulus and social spending programs raises concerns about the long-term sustainability of the national debt. While these measures may provide short-term economic relief, they come at the cost of increasing the burden on future generations.
It is crucial for governments to prioritize fiscal responsibility and implement prudent fiscal policies to address the looming debt crisis. This includes reducing unnecessary government spending, implementing measures to boost economic growth and revenue generation, and actively managing debt levels.
In addition to government actions, it is also essential for investors to take a cautious approach and assess the risks associated with government bonds. Diversifying investment portfolios and considering alternative assets can help mitigate the impact of a potential debt crisis.
As the warning signs of a debt crisis become more evident, it is crucial for governments to take immediate action to avert a financial catastrophe. Ignoring these warning signs and continuing on a path of excessive borrowing will only lead to dire consequences for the economy and future generations.
In conclusion, the looming debt crisis should not be taken lightly. Governments must acknowledge the warning signs and take proactive measures to address the growing debt levels. Likewise, investors should exercise caution and diversify their portfolios to mitigate the potential risks. Only through responsible fiscal management and prudent investment strategies can we hope to navigate through the challenges posed by the impending debt crisis.
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