The US is now 9 days away from potentially defaulting on its debt
05:09 - Source:CNN
Hong Kong CNN—
As the clockticks downtoward 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 nowsputteringas consumption, investments, and industrial output all show signs of slowing.Deflationary pressurehas worsened as consumer prices barely moved during the past few months. Another major concern is the soaringunemployment ratefor young people, which hit a record level of 20.4% in April.
Japan’s economy, meanwhile, is just showing signs ofemerging 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 haveproposedprioritizing 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 asreal 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 tradehit a record highof $691 billion. Japan’sexports to Americaincreased 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 toReuters.
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 publisheda columnearlier 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
Why China and Japan are praying the US won't default | CNN Business? ›
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.
What country does the US owe the most money to? ›With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt. Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years.
Who owns most of the US debt? ›Which countries hold the most US debt? Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.
Why does Japan owe the US money? ›Japan's large holdings of U. S. debt can be attributed to Japan's large trade surplus, low-interest rates, and limited investment opportunities in their own domestic markets.
What happens if the US defaults on debt? ›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.
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% |
America's debt has risen massively since the beginning of the 21st century, as "politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers, and emergency measures to help the nation endure two debilitating recessions," writes Jim ...
Do any countries owe the US money? ›How about Ireland, the Cayman Islands, and Brazil? Did you expect them to be substantial holders of U.S. debt? Then there are the countries that owe America money. Even though Japan holds the biggest amount of U.S. debt, the U.S. is also owed a lot of money by them too.
Who does the US owe its debt to? ›Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.
Has the US ever defaulted? ›The U.S. has never reached the point of default where the Treasury was incapable of paying U.S. debt obligations, though it has been close on several occasions. The only exception was during the War of 1812 when parts of Washington D.C. including the Treasury were burned.
Who 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.
Does Japan still owe war reparations? ›Reparations amounting to US$200 million (72 billion yen) were made to Burma, and US$223.08 million (80.3088 billion yen) to Indonesia. The Soviet Union waived its rights to reparations from Japan, and both Japan and the Soviet Union waived all reparations claims arising from war.
Who does the US owe more money to China or Japan? ›Japan held $1.08 trillion in Treasury securities as of November 2022, beating out China as the largest foreign holder of U.S. debt.
Can us ever pay off debt? ›In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.
Which country has defaulted the most? ›- 10 Countries That Are Most Likely to Default. Mar 17, 2023. ...
- Argentina. The country is facing economic turmoil with a weakened currency, critically low reserves, and bonds trading at a low price. ...
- Ukraine. ...
- Tunisia. ...
- Ghana. ...
- Egypt. ...
- Kenya. ...
- Ethiopia.
A debt doesn't generally expire or disappear until its paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt.
What country is #1 in debt? ›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%. The United States' government's spending exceeds its income most years, and the US has not had a budget surplus since 2001.
Which person has the highest debt in the world? ›Former Société Générale rogue trader Jérôme Kerviel owes the bank $6.3 billion. Here's what his case tells us about financial reform.
Is China in a debt crisis? ›The region's lgfvs have already experienced more than 20 defaults on trust loans and other hidden debts since the start of 2022, many more than in other provinces. As problems have intensified in recent weeks, economists and investors have warned that the central government has few palatable options.
How can we fix US debt? ›- Avert a debt ceiling crisis and build consensus with a bipartisan commission on fiscal reform/debt reduction. ...
- Make fiscal restraint a priority. ...
- Reform Medicare/health care policy. ...
- Save Social Security. ...
- Remove budget gimmicks and pay for new initiatives. ...
- Reform tax policy.
What would happen if the US defaulted? ›
A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
How high can the US debt go? ›The debt limit caps the total amount of allowable outstanding U.S. federal debt. The U.S. hit that limit—$31.4 trillion—on January 19, 2023, but the Department of the Treasury has been undertaking a set of “extraordinary measures” so that the debt limit does not yet bind.
How much money does Mexico owe us? ›| 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% |
As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.
How much money does the US owe to itself? ›Nearly all of that debt – about $31.38 trillion – is subject to the statutory debt limit, leaving just $25 million in unused borrowing capacity. 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.
How much money is the US worth? ›The financial position of the United States includes assets of at least $269.6 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP){{refn|name=position|group=lower-alpha|See section Estimated financial position, Q1 2014 for calculations.
Does China have more debt than the US? ›The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.
Who holds most of China's debt? ›Who owns China debt? Most of China's local government debt, one of the most regular issuers of domestic debt, is held by state-owned or state-controlled financial institutions. For decades, China's local governments have relied on off balance sheet borrowing through local government financing vehicles (LGFVs).
What happens if we reach the debt ceiling? ›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.
Will the stock market crash if the US defaults on its debt? ›A debt default could plunge the stock market as much as 45%. The U.S. could breach the debt ceiling as soon as next week, plunging the stock market by nearly half if a protracted default ensues, according to a White House projection.
Has US debt ever been downgraded? ›
In 2011, S&P gave its first-ever credit downgrade to the U.S., cutting its rating to AA+. Over a decade later, that agency has still not restored its rating. A U.S. default could send shockwaves throughout the global economy and potentially cause a recession, according to experts.
When did the US start borrowing money? ›1776: The Birth of Public Debt
In 1776, a committee of ten founders took charge of what would become the Treasury, and they helped secure funding for the war through "loan certificates" (equivalent to bonds) with which they borrowed money for the fledgling government from France and the Netherlands.
| French obligations received by U. S. treasury under Liberty Loan acts | $2,997,477,800.00 |
|---|---|
| Bonds received by Secretary of War in payment for surplus war supplies | 407,341,145.01 |
| (interest on war-surplus bonds has been regularly paid) | |
| TOTAL DEBT | $4,137,224,354.57 |
The case of debts arising from World War II is somewhat less complicated. At this time only four countries, discussed below, owe the U.S. government debts of any size arising from World War II programs to aid our allies. Other countries have paid their debts in full.
Why is Japan so rich after ww2? ›One reason for Japan's quick recovery from war trauma was the successful economic reform by the government. The government body principally concerned with industrial policy in Japan was the Ministry of International Trade and Industry.
Has China forgiven Japan? ›After 60 years there is still no prospect of a true reconciliation between China and Japan. The recent visit by Junichiro Koizumi, Japan's prime minister, to a war shrine in central Tokyo was condemned by the Chinese.
Did America pay to rebuild Japan? ›After World War II, the United States also understood the strategic importance of using foreign assistance and other tools to aid and rebuild post-war Japan. Between 1946 and 1952, Washington invested $2.2 billion — or $18 billion in real 21st-century dollars adjusted for inflation — in Japan's reconstruction effort.
Who is richer between US and China? ›The U.S. makes up 23.93% of the total global economy, says Investopedia. The World Bank Group lists China as the second richest country in the world as of 2021, possessing a GDP of $17.734 trillion along with a GDP per capita of $12,556.3. China makes up 18.45% of the total global economy.
How much does America owe Chinese? ›How much money does the U.S. owe to China? China owns roughly $1.08 trillion worth of U.S. debt. 2 This amount is subject to market fluctuations. The value will change whenever China trades Treasury securities or when the prices of those bonds change.
Was Japan richer than the US? ›The country is the third-largest in the world by total wealth. Japan formerly had the second-largest assets and wealth, behind only the United States in both categories, until it was surpassed by China in both assets and wealth. Japan also had the world's second-largest economy by nominal GDP behind the United States.
What would happen if the US printed enough money to cover all the debts? ›
Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse. This would be, as the saying goes, "too much money chasing too few goods."
How much debt does the average American have? ›Average American household debt statistics
The average American holds a debt balance of $96,371, according to 2021 Experian data, the latest data available.
The average U.S. household has $6,473 in credit card debt
According to data from Experian, the average American's credit card balance in the third quarter of 2021 was $5,221. The Ascent examined research on American credit card debt and found that Americans had $841 billion in credit card debt in 2022.
Today, a government that defaults may be widely excluded from further credit; some of its overseas assets may be seized; and it may face political pressure from its own domestic bondholders to pay back its debt. Therefore, governments rarely default on the entire value of their debt.
What happens if government defaults on debt? ›The dollar is a global reserve currency and U.S. bonds are seen as one of the most stable investments on the planet. 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.
What is the 11 word phrase to stop debt collectors? ›If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.
Do credit cards forgive debt? ›Credit cards are another example of a type of debt that generally doesn't have forgiveness options. Credit card debt forgiveness is unlikely as credit card issuers tend to expect you to repay the money you borrow, and if you don't repay that money, your debt can end up in collections.
What is a good credit score? ›Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
Which country is owed the most? ›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%.
How much money does the US owe everyone? ›The $31 trillion gross federal debt equals debt held by the public plus 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. Learn more about different ways to measure our national debt.
Which country owes the most money to China? ›
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.
Who is America in debt to? ›Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.
What happens if China dumps US bonds? ›If the China bloc disposes of net foreign assets amounting to more than 20% of GDP by offloading US bloc bonds over 10 years, the IMF finds that the China bloc's domestic interest rates would fall by four basis points.
Did America get rich after ww2? ›Driven by growing consumer demand, as well as the continuing expansion of the military-industrial complex as the Cold War ramped up, the United States reached new heights of prosperity in the years after World War II.
Was America rich after ww2? ›As the Cold War unfolded in the decade and a half after World War II, the United States experienced phenomenal economic growth. The war brought the return of prosperity, and in the postwar period the United States consolidated its position as the world's richest country.
Does Russia owe US money for ww2? ›But if Congress failed to ap prove it in a certain period of time, the deal would be off. At the end of World War II, the United States decided that Russia owed $2.6‐billion for civilian goods that were still in use and wrote off the cost of war matériel. But the United States asked that Russia pay only $1.3‐billion.
Can US ever pay off debt? ›In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.
How much is America worth? ›United States - Federal Government; Net Worth (IMA), Level was -20997153.00000 Mil. of $ in July of 2022, according to the United States Federal Reserve.
Who does Mexico owe money to? ›dynamic and g rowing Mexico will be able THE CURRENT DILEMMA Of Mexico's $98 billion foreign debt, nearly $75 billion is owed to commercial banks, with U.S. banks holding about one-third of the IOUs. The rest is owed to other banks worldwide.
What countries are trapped in China debt? ›In 2020, the African countries with the largest Chinese debt were Angola ($25 billion), Ethiopia ($13.5 billion), Zambia ($7.4 billion), the Republic of the Congo ($7.3 billion), and Sudan ($6.4 billion).