US' record-breaking $40 trillion national debt raises global concern

Impact of war

US Treasury Secretary Scott Bessent has been keen to reduce the deficit to 3 percent of gross domestic product by 2028. It is currently over 6 percent.

Bessent said in August that the US war with Iran and the tariff refunds had contributed to the deficit growing. The war in Iran, and skirmishes over the Strait of Hormuz, which carried one-fifth of global oil consumption before the conflict, caused energy prices to spike in the US. It has also affected economic growth.

Mohammad N. Elahee, a professor of international business at Quinnipiac, told China Daily: "The US is an integral part of a complex web of a global trading and financial system whose stability is essential for a healthy US economy.

"A prolonged period of US-Israel-induced global instability may motivate other nations' need to diversify away from dollar-denominated international transactions."

The US Treasury made a surprise announcement on Aug 19 that it planned to purchase government bonds and double the size of buybacks by increasing the maximum size of its liquidity-support buybacks in the 10-to-20-year and 20-to-30-year sectors from $2 billion to at least $4 billion per operation.

The Treasury said that the increased buyback size will take effect on Sept 9, and remain in effect through Nov 4, the end of the current refunding quarter. The move is an attempt to contain US borrowing costs and calm a jittery market.

Bessent said they may seek more than the planned $4 billion if needed, depending on the market. He said it was a liquidity measure due to the 30-year sector seeing conditions that were "very poor". He did not specify how the purchase would be financed.

Two Treasury sources told US media on Aug 24 that the Treasury could tap into its nearly $1 trillion General Account to help fund its planned purchases of government bonds. The TGA acts like the federal government's checking account that is held at the Federal Reserve. It is funded with government receipts including tax collections. It has approximately $950 billion in it, but this fluctuates daily.

The TGA is controlled by the Treasury and not the Federal Reserve, and is not itself a monetary-policy tool.

The Federal Reserve holds $6.8 trillion worth of government bonds and mortgage-backed securities. The Fed's new chairman Kevin Warsh, who took the helm in May, said it is a top priority to reduce those holdings.

Bessent said in a CNBC interview that his plan could resemble a "Treasury twist", a government or Fed operation where long-term Treasurys are bought and paid for with short-term issuance.

In an analysis published on its website on Aug 24, investment publication Barron's said there is a fear the TGA-funded buybacks would only be a band-aid solution.

The publication reported that bond traders saw the move as "temporary relief" and not a reversal of the "overall high-yield environment" because underlying federal borrowing needs are still large.

If the Treasury draws down money from its TGA, it would leave the government with less of a cash cushion for any future debt limit standoffs, especially if the debt ceiling is reached.

The Bipartisan Policy Center estimates that the US will reach the $41.1 trillion statutory debt limit between late winter and midsummer of 2027. If the limit is reached, the Treasury must use measures to address it.

Congress would have to vote on whether to raise or suspend it, as it is responsible for setting a limit to federal borrowing. It can also adjust or abolish it.

In August, Bessent, in conjunction with Japanese officials, made the rare decision to prop up the weakening Japanese yen, to prevent Tokyo from selling its US Treasury holdings.

The US Treasury market is the largest bond market in the world. Worldwide, yields on the government's debt are used for business loans and mortgages.

The ballooning US deficits are being noted by investors in American bonds. At the end of August, the yield on 30-year US Treasuries hit its highest level in nearly 20 years.

Higher Treasury yields — the interest rates the government pays to borrow money — could mean higher rates of borrowing for American consumers and businesses already scarred by persistent inflation.

Ball said it is important for a concrete plan to tackle the debt to be laid out as this "shows the lenders giving us funds that we are reliable. Failing to do that will mean they will charge us higher interest rates as we borrow more and make the fiscal hole we are in even deeper."

belindarobinson@chinadailyusa.com