The US is now 9 days away from potentially defaulting on its debt
05:09 - Source: CNN
Hong Kong CNN —
As the clock ticks down toward an unprecedented US debt default, the world’s second- and third-biggest economies are watching in fear.
China and Japan are the largest foreign investors in American government debt. Together they own $2 trillion — more than a quarter — of the $7.6 trillion in US Treasury securities held by foreign countries.
Beijing started to ramp up buying of US Treasuries in 2000, when the United States effectively endorsed China’s entry into the World Trade Organization, triggering an export boom. That generated vast amounts of dollars for China and it needed a safe place to stash them.
US Treasury bonds are widely regarded as one of the safest investments on Earth, and China’s holdings of US government debt ballooned from $101 billion to peak at $1.3 trillion in 2013.
China was the largest foreign creditor to the United States for more than a decade. But an escalation of tensions with the Trump administration in 2019 saw Beijing pare back its holdings, and Japan surpassed China as the top creditor that year.
Tokyo now holds $1.1 trillion, to China’s $870 billion, and that heavy exposure means both countries are vulnerable to a potential crash in the value of US Treasuries if the doomsday scenario for Washington were to unfold.
“Japan and China’s large Treasury holdings could hurt them if the value of Treasuries plummets,” said Josh Lipsky and Phillip Meng, analysts from the Atlantic Council’s GeoEconomics Center.
The falling value of Treasuries would lead to a drop in Japan and China’s foreign reserves. That means they would have less money available to pay for essential imports, service their own foreign debts, or prop up their national currencies.
Nevertheless, the “real risk” comes from the global economic fallout and likely US recession that could follow from a default, they said.
“That is a serious concern for all countries but poses a particular risk to China’s fragile economic recovery,” Lipsky and Meng said.
After an initial burst in activity following the abrupt lifting of pandemic restrictions late last year, China’s economy is now sputtering as consumption, investments, and industrial output all show signs of slowing. Deflationary pressure has worsened as consumer prices barely moved during the past few months. Another major concern is the soaring unemployment rate for young people, which hit a record level of 20.4% in April.
Japan’s economy, meanwhile, is just showing signs of emerging from stagnation and deflation, which have haunted the country for decades.
Devastating impact
Even if the US government runs out of money and extraordinary measures to pay all its bills — a scenario that Treasury Secretary Janet Yellen has said could happen as early as June 1 — the likelihood of a US default may still be low.
Some US lawmakers have proposed prioritizing the payment of interest on bonds to the biggest bondholders.
This would be done at the expense of other obligations, such as payment of government pensions and salaries to government employees, but would stave off major debt defaults to the likes of Japan and China, said Alex Capri, senior lecturer at NUS Business School.
And without a clear alternative, in response to rising market volatility investors could swap shorter term bonds for longer term debt. That could benefit China and Japan, because their holdings are concentrated in longer-term US Treasuries, according to Lipsky and Meng from the Atlantic Council.
That said, broader financial contagion and economic recession are a much bigger threat.
“A debt default in the US would mean a fall in US Treasury prices, a rise in interest rates, a fall in the value of the dollar, and increased volatility,” said Marcus Noland, executive vice president and director of studies at the Peterson Institute for International Economics.
“It would also likely be accompanied by a fall in the US stock market, increased stress on the US banking sector, and increased stress on the real estate sector.”
That could lead the interconnected global economy and financial markets to stumble, too.
China and Japan are dependent on the world’s biggest economy to support companies and jobs at home. The export sector is especially crucial to China, as other pillars of the economy — such as real estate — have faltered. Exports generate a fifth of China’s GDP and provide jobs for around 180 million people.
Despite rising geopolitical tension, the United States remains China’s single largest trading partner. It’s also the second largest for Japan. In 2022, US-China trade hit a record high of $691 billion. Japan’s exports to America increased by 10% in 2022.
“As the US economy slowed, the impact would be transmitted through trade, depressing Chinese exports to the US, for example, and contributing to a global slowdown,” said Noland.
Deep concerns
Bank of Japan Governor Kazuo Ueda expressed concerns last Friday, warning that a US debt default would cause turmoil in various markets and have serious consequences for the global economy.
“The Bank of Japan will strive to maintain market stability based on its pledge to respond flexibly with an eye on economic, price and financial developments,” he told parliament, according to Reuters.
Beijing, so far, has been relatively quiet on the matter. The foreign ministry commented Tuesday that it hopes the United States will “adopt responsible fiscal and monetary policies” and “refrain from passing on risks” to the world.
Chinese state news agency Xinhua published a column earlier this month, highlighting the “symbiotic relationship” the countries have in the US bond market.
“If the United States defaults on its debt, it will not only discredit the United States, but also bring real financial losses to China,” it said.
There’s nothing much Tokyo or Beijing can do, other than wait and hope for the best.
Hastily dumping US debt would be “self-defeating,” Capri said, as it would significantly drive up the value of the Japanese yen or the Chinese yuan against the dollar, causing the cost of their exports to “go through the roof.”
Longer-term benefits?
In the longer term, some analysts say a potential US default could push China to accelerate its drive to create a global financial system that is less dependent on the dollar.
The Chinese government has already struck a series of deals with Russia, Saudi Arabia, Brazil, and France to increase the use of yuan in international trade and investment. A Russian lawmaker said last year the BRICS countries, namely China, Russia, India, Brazil, and South Africa, are exploring the creation of a common currency for cross-border trade.
“This will certainly serve as a catalyst for China to continue to push the internationalization of the yuan, and for Beijing to double down on its efforts to bring its trading partners into the newly announced ‘BRICs Currency’ initiative,” Capri said.
However, China faces some serious obstacles, such as controls it applies to how much money can flow in and out of its economy. Analysts say Beijing has shown little willingness to fully integrate with global financial markets.
“A seriouspush for de-dollarization would see … much more volatile yuan trading,” said Derek Scissors, senior fellow at the American Enterprise Institute.
Recent data from international payments system SWIFT showed that the yuan’s share of global trade financing was 4.5% in March, while the dollar accounted for 83.7%.
“There is still a long way to go before a credible alternative to the US dollar can emerge,” Lipsky and Meng said.
FAQs
Which country owns most U.S. debt? ›
For the past 20 years, Japan and China have been the top two foreign countries with US Treasuries. According to usafacts.org, as of January 2023, Japan owned $1.1 trillion in US Treasuries, making it the largest foreign holder of the national debt.
What happens if the U.S. goes into default? ›Economically, according to forecasts by the White House even a brief default would result in half a million lost jobs and a somewhat shallow recession. A protracted default would push those numbers to a devastating eight million lost jobs and a severe recession, with the economy shrinking by more than 6 percent.
How much debt does China hold of the United States? ›China and Japan are the largest foreign investors in American government debt. Together they own $2 trillion — more than a quarter — of the $7.6 trillion in US Treasury securities held by foreign countries.
What is the safest place for money if the government defaults? ›Gold: The Traditional Safe Haven
“If the debt ceiling is not raised and the government defaults on its debt obligations, investors may turn to gold and other precious metals to protect their wealth.” The largest precious metals ETF is SPDR Gold Shares (GLD), with $60.7 billion in net assets.
Eliminating the U.S. government's debt is a Herculean task that could take decades. In addition to obvious steps, such as hiking taxes and slashing spending, the government could take a number of other approaches, some of them unorthodox and even controversial. Below are some of these options.
Who owes the United States money? ›Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
How do you prepare for a US default? ›- Build an emergency fund. ...
- Reduce debt. ...
- Wait to buy a home. ...
- Diversify your investments but don't overdo it. ...
- Review and adjust financial plans.
Flashpoints that greatly contributed to the debt over the past 50 years include the wars in Iraq and Afghanistan, the 2008 financial crisis and the 2020 COVID-19 pandemic -- the latter two prompting sweeping stimulus measures from Congress that cost trillions of dollars.
How much debt is the US in? ›The United States has the world's highest national debt at $31.4 trillion. Global debt currently stands at $305 trillion, $45 trillion higher than before the COVID-19 pandemic, according to the Institute of International Finance (IIF) – a global association of the financial industry.
Why does the US owe so much money to China? ›U.S. debt to China comes in the form of U.S. Treasuries, largely due to their safety and stability. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.
Which country has highest loan in the world? ›
United States. The United States boasts both the world's biggest national debt in terms of dollar amount and its largest economy, which resolves to a debt-to GDP ratio of approximately 128.13%.
Is China more indebted than US? ›As recently as 2020, total debt in the United States relative to GDP exceeded China's. But as of mid-2022, China's relative debt burden stood 40 percent higher than America's.
Where do millionaires keep their money? ›Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. They establish an emergency account before ever starting to invest. Millionaires bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth.
Should I withdraw my money from the bank 2023? ›Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.
Where do I put cash if US defaults? ›If you want to shift into cash, the safest option may be to sock away the money in a high-interest savings account at an FDIC-insured bank that pays a rate of more than 4% or in certificates of deposit, experts say.
What happens if the US gets too much debt? ›A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth.
What if America paid off its debt? ›If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world. "It was a huge issue ... for not just the U.S. economy, but the global economy," says Diane Lim Rogers, an economist in the Clinton administration. The U.S. borrows money by selling bonds.
What happens if the US goes over the debt limit? ›Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States' financial market and tip its economy—and the world's—into immediate recession.
Which country has no debt? ›| Characteristic | National debt in relation to GDP |
|---|---|
| Macao SAR | 0% |
| Brunei Darussalam | 2.06% |
| Kuwait | 2.92% |
| Hong Kong SAR | 4.26% |
China has a secret: It owes American investors hundreds of billions of dollars. The Chinese government doesn't like to talk about it and the U.S. government doesn't want to raise it. But decades ago, Beijing defaulted on debt owed to Americans, as well as investors and governments around the world.
Where does the US borrow money from? ›
The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government. Offered in a wide range of maturities.
Can I argue a default? ›You can ask for an inaccurate default record to be updated or removed by raising a credit report dispute. Here's how to do this: Get your credit report to see the default entry. Get in touch to tell us how and why it should be changed.
Who are the US in debt to? ›Top 10 territories that own the most U.S. debt
Japan owns the most at $1.1 trillion, followed by China, with $859 billion, and the United Kingdom at $668 billion.
IMF To The Rescue
The defaulting country also approaches its unilateral and bilateral allies to alleviate the economic crisis. Furthermore, the defaulting country can also engage in a debt restructuring plan. This can be done by either extending the date to repay their debts or devaluing their currency.
For the fourth quarter of 2019, total wealth in the U.S. was $111.04 trillion.
When was the last time the United States was debt free? ›When was the last time the U.S. was debt free? January 1835 was the first and only time all of the government's interest-bearing debt was paid off, according to the Treasury Department.
How much money is the US in debt to itself? ›The $32 trillion gross federal debt includes debt held by the public as well as debt held by federal trust funds and other government accounts. In very basic terms, this can be thought of as debt that the government owes to others plus debt that it owes to itself.
Who owes China the most money? ›At the end of 2021, of the 98 countries for whom data was available, Pakistan ($27.4 billion of external debt to China), Angola (22.0 billion), Ethiopia (7.4 billion), Kenya (7.4 billion) and Sri Lanka (7.2 billion) held the biggest debts to China.
What would happen if China called the U.S. debt? ›Consequences of Owing Debt to the Chinese
If China called in all of its U.S. holdings, the U.S. dollar would depreciate, whereas the yuan would appreciate, making Chinese goods more expensive.
When adding portfolio debts (including the $1 trillion of U.S. Treasury debt purchased by China's central bank) and trade credits (to buy goods and services), the Chinese government's aggregate claims to the rest of the world exceed $5 trillion in total.
Who is the biggest borrower in the world? ›
India takes the top spot. Its $39.7bn debt towards the WB recorded at the end of 2021 is double that of the next biggest debtor, Indonesia, with $19.6bn.
Who owns the world bank? ›The organizations that make up the World Bank Group are owned by the governments of member nations, which have the ultimate decision-making power within the organizations on all matters, including policy, financial or membership issues.
Is the US national debt a problem? ›For several years, the nation's debt has been bigger than its gross domestic product, which was $26.13 trillion in the fourth quarter of 2022. Debt-to-GDP is a useful metric for analyzing the debt over long time spans, as it puts the debt into relative terms by comparing it against the size of the national economy.
Does China owe money? ›China's national debt has been growing due to a combination of factors, including government spending on development projects and slowing economic growth.
Why does Japan own so much U.S. debt? ›Why Does Japan Buy U.S. Debt? Because Japan exports so many goods to the U.S. and other nations, the country frequently develops an account surplus in dollars - the currency the U.S. and other countries give Japan in exchange for their products.
Is China's economy better than us? ›At the beginning of 2023, the U.S.'s real GDP stood at around $20 trillion and China's at around $16 trillion—leaving a gap of $4 trillion. If the U.S. were leaving its closest peer in the dust, at the end of 2023, that gap will have widened.
What bank do rich people use? ›Citi Private Bank is the private banking department of Citibank. Their services are reserved for worldly and wealthy individuals as well as their families. While eligible clients can get deposit accounts and retirement accounts as you'd find at any other bank, there are also many specialized products and services.
Do billionaires use credit cards? ›For rich folks, credit cards are a tool to manage their finances and simplify their spending. Credit cards give people a convenient way to spend, and that includes the wealthy. They often use credit cards to make large purchases or to pay for travel and entertainment expenses.
How do 90% of millionaires make their money? ›“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago. Some of the most successful entrepreneurs in the world have built their wealth through real estate.
What is the safest bank in the US? ›This is true whether the bank or credit union is national, regional or local. Asset-heavy, diversified and regulated banks like JPMorgan Chase, Wells Fargo, PNC Bank and U.S. Bank are among the safest banks in the U.S. and should be considered if you are weighing your options.
Where is the safest place to keep cash at home? ›
Where to safely keep cash at home. Just like any other piece of paper, cash can get lost, wet or burned. Consider buying a fireproof and waterproof safe for your home. It's also useful for storing other valuables in your home such as jewelry and important personal documents.
What happens to my money in the bank if the dollar collapses? ›Enter the Federal Deposit Insurance Corporation. The FDIC is responsible for regulating the banking industry in the United States, and the agency insures deposit accounts at member banks. Depositors are insured up to $250,000 per account, per bank, and per ownership category.
What will happen if USA defaults? ›So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.
What is the safest investment if the US defaults? ›Gold: The Traditional Safe Haven
“If the debt ceiling is not raised and the government defaults on its debt obligations, investors may turn to gold and other precious metals to protect their wealth.” The largest precious metals ETF is SPDR Gold Shares (GLD), with $60.7 billion in net assets.
A U.S. debt default would lead to a slump in stock and bond markets, while eroding the U.S.' financial standing in the world, analysts say.
Do any countries owe the US money? ›As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).
What nations round out the top 5 owners of U.S. debt? ›| Rank | Country | Share of Total |
|---|---|---|
| 2 | 🇨🇳 China | 11.9% |
| 3 | 🇬🇧 United Kingdom | 8.9% |
| 4 | 🇧🇪 Belgium | 4.8% |
| 5 | 🇱🇺 Luxembourg | 4.5% |
China has a secret: It owes American investors hundreds of billions of dollars. The Chinese government doesn't like to talk about it and the U.S. government doesn't want to raise it. But decades ago, Beijing defaulted on debt owed to Americans, as well as investors and governments around the world.
What country has no debt? ›| Characteristic | National debt in relation to GDP |
|---|---|
| Macao SAR | 0% |
| Brunei Darussalam | 2.06% |
| Kuwait | 2.92% |
| Hong Kong SAR | 4.26% |
| Mexico External Debt - Historical Data | ||
|---|---|---|
| Year | Current US $ | Annual % Change |
| 2020 | $605,051,650,395 | -0.84% |
| 2019 | $610,189,277,504 | 0.62% |
| 2018 | $606,453,577,060 | 4.90% |
Why is the US in so much debt? ›
Flashpoints that greatly contributed to the debt over the past 50 years include the wars in Iraq and Afghanistan, the 2008 financial crisis and the 2020 COVID-19 pandemic -- the latter two prompting sweeping stimulus measures from Congress that cost trillions of dollars.