Happy New Year: Quantitative quantum debt in 2020 and stargazing

Happy New Year! Quantitative easing is back! On October 15, 2019, the Federal Reserve of the United States began purchasing billions of dollars worth of short-term US treasury bills each month in order to pump liquidity into the banking system. Such step was necessary to allow American banks to open their doors each day. It has had the effect of keeping interest rates low. But deep down inside, the one question that insiders ask but cannot say is whether it bandages a mortal wound in America's financial system.

The debt buy-back is an aggregated version of quantitative easing. Quantitative easing was instituted by US President George Bush Jr. as response to the sub-prime crisis and financial collapse of America's banks and financial institutions in 2008. Effectively, the Federal Reserve purchased back its own debt against which it pumped liquidity into the market, bailing out the banks. The policy was continued almost blindfolded throughout the eight years of the Obama administration. In his campaign for the 2016 presidency, Trump repeatedly cited the excessive American debt as one of the most urgent issues to be addressed. Instead, he has re-instated the same quantitative easing policy, only re-naming it "repo", and jacking up the debt to unprecedented levels. The multi-trillion dollar question is: when will the house of cards come down, and at whose cost?

In short repo occurs on a daily basis involving a debt buy-back of $75 billion each day to keep the economy going. There is a second repo that occurs involving a $35 billion debt buy back every 14 days executed twice a week.

Just to put this in perspective during the Obama administration the quantitative easing during QE1 reached a total of $300 billion, QE2 $600 billion in total, jumping to QE4 which reached $45 billion in re-purchased debt each month. What was re-purchased each month during Obama's QE4 is less than what is being re-purchased each day right now! So imagine this is quantum debt.

The US federal government debt on New Year's Eve 2019 stands at $22.72 trillion, equivalent to 106.5 percent of GDP. Debt-asset ratios of developed nations should not exceed 50 percent. So this debt pyramid is irrationally dangerous. It exceeds even the very notion of a pyramid. Imagine Stephen Hawkings giving a lecture about the boundless ends of the universe. Now close your eyes and imagine, that is how big America's debt is.

Who carries the debt? China? Japan? In terms of US Treasury bills, in mid-2019 Japan held $1.12 trillion, China held $1.1 trillion, while American financial institutions hold the bulk at $21 trillion. In short foreign creditors hold 30 percent of America's debt. While 70 percent is being held by US financial institutions, banks and pension funds themselves, and even the Federal Reserve itself. In short, international creditors are reducing their US debt holdings as quickly as possible, while American creditor institutions are being gently persuaded to take on even more debt. As New Year's greetings, we wish them the best of luck!

Why can America's debt defy gravity? The post-Bretton Woods system established the US dollar as the global reserve currency and clearing currency. That is why. If a second reserve or clearing currency should really emerge on the global scene, well, that quantum pyramid might just become sand overnight.

This is the main reason for Washington's steadfast anxious rejection of Belt and Road and the notion of a pan-Asian-African-Eastern European integrated infrastructure and communications systems. Should the Chinese yuan or a basket of emerging economy currencies of Belt and Road countries serve as a second reserve currency, the writing is on the wall.

So how farfetched is this idea? The knee-jerk reaction is to say well yuan is not freely convertible so how can it become either a reserve or clearing currency? However, with direct yuan swap agreements with countries of the Belt and Road network, it is quickly becoming a clearing currency, especially when Chinese or Asian Infrastructure Investment Bank infrastructure lending is involved. China has entered into multiple direct swap arrangements with nations of the Belt and Road network. Remember the ancient Silk Road. Well, think of the yuan as something like silk.

Most of these transactions run through Hong Kong, the third-largest financial center in the world, and certainly the largest global financial center on the Belt and Road map. A destabilization of Hong Kong would have the effect of throwing off the directional trajectory of a second reserve or clearing currency, giving free reign for years of America's repo or quantum debt balloon, delaying America's financial universe from cascading into a black hole.

External influences and a Western media blackout on the realities of the Hong Kong riots and destabilization factors would be explainable if one looked at the financial realities of America and the opportunities that the rest of the world presents. Of course, to say any of this in the American media would be politically incorrect. So best to stargaze on New Year's eve and think of what Stephen Hawkings once said and apply it to America's repo debt, "There ought to be something very special about the boundary conditions of the universe, and what can be more special than that there is no boundary?"

The author is the founding director of the Himalayan Consensus and a senior international fellow at the Center for China and Globalization.

The opinions expressed here are those of the writer and do not necessarily represent the views of China Daily and China Daily website.