Analysts and policymakers within China are becoming increasingly worried about the sustainability of U.S. government debt. Because with each passing day, these congresspeople should be alarmed that the national debt has just crossed an alarming $37 trillion. The alarming figures indicate a concerning trend: the U.S. government paid an unprecedented $1.13 trillion in interest expenses during fiscal 2024, marking the first time interest expenses have eclipsed the $1 trillion threshold.
Those projections for fiscal 2025 indicate that interest expenses are on a path to set new records. Yet the financial burden is growing faster than ever. In July, the monthly budget gap plunged to $294.14 billion — a staggering 19 percent increase from the year prior. Our federal government continues to operate under tremendous deficits. With every dollar it borrows or spends, international observers, particularly on China’s own turf, become more fearful over China’s reckless borrowing and spending.
Foreign countries—China, primarily—currently have about 6.5 percent of their total reserves in U.S. Treasuries. Chinese analysts call for a doctrinal change. They want to minimize the exposure to U.S. debt while increasing their investments in gold. We told you that the PBOC has been buying huge amounts of physical gold under the radar. This decision is readable as a decisive pivot in their thinking as fiscal instability ramps up.
The bond market is experiencing elevated nerves on many counts. This is due to the increasing U.S. debt and the necessity to issue increasingly larger Treasury securities to finance the continuing deficits. In other words, in the past few months, foreign investors have fled en masse from U.S. bonds. Their purchases have fallen to only 64.2 percent, a free fall from 88 percent in April.
This ebbing demand creates even more difficulties for the U.S. government, already facing its own borrowing-is-not-a-solution dilemma. An increase in demand for debt could be offset by other factors, increasing borrowing costs and making an already challenging fiscal picture even more daunting.
Citing the theory that U.S. Treasuries have already crossed the default Rubicon, economists from the Bank of China warned that they cautioned that the expansion is currently unsustainable. They called for making thoughtful redemptions to U.S. Treasury assets. They proposed increasing stockpiles of gold and other critical materials.
The worry is growing that an unexpected bad event would trigger systemic contagion and chain reactions. For this reason, these reactions will have a profound effect on many markets and asset classes. For beginners, analysts are cautioning that this will deepen financial market turmoil across the world.
WolfStreet’s own analysts Pilkington and Wolf were among the growing chorus of voices in the bond market who were alarmed at the rapidly increasing U.S. debt. They pointed out the tsunami of new Treasury securities that the government will have to auction off to fund its exploding deficits. They noted the diversity of backgrounds for Treasury buyers and holders. We may need higher yields to attract a new generation of buyers, especially with the Federal Reserve performing quantitative tightening (QT) in real time by reducing its billions of dollars in Treasury holdings.
As these trends play out, the potential impacts on U.S. export and global import markets are far-reaching. The U.S. government must navigate its growing debt burden while addressing the diminishing appetite for its bonds among foreign investors.