After a span of four years, the United States has finally lowered interest rates. However, this surrender-style rate cut has not rescued the U.S. economy. Two major bombshells that followed have sent shivers down Wall Street, as the U.S. is experiencing a historical reckoning, and there is a possibility that the global financial storm of 2008 could reoccur.
The first piece of news is that U.S. Treasury bonds have been completely abandoned. Not only have they faced short selling by allies, but even the Federal Reserve couldn't resist joining in the fray, harvesting their own bonds in an unprecedented move.
According to the latest data released by the U.S. Department of the Treasury, as of July this year, among the top ten overseas holders of U.S. debt, six have chosen to sell, including the United Kingdom, France, Belgium, and Switzerland, as well as the largest overseas debt holders, Japan and China.
This is quite astonishing. Apart from China, these countries are all so-called allies of the United States, who appear to be obedient and respectful on the surface, but their actions speak otherwise, especially Japan.
Presently, Japan has become the largest short seller of U.S. debt. The Bank of Japan is selling U.S. bonds at a speed that is hard to keep up with. They sold $2 billion in July, and between April and June, they had already sold a combined total of $72.1 billion. This not only startled the U.S. Department of the Treasury but also took the world by surprise.
Such an unusual move to short U.S. debt has infuriated U.S. Treasury Secretary Yellen. Japan quickly made it onto the U.S.'s currency manipulation watchlist, which is an extremely rare phenomenon in history.
With Japan taking the lead and China following suit, another $3.7 billion in U.S. debt was sold in July. The peak of our holdings was in November 2013, at a scale of $1.32 trillion. Compared to the current holdings of $776.5 billion, there has been a 41% reduction, and the力度 of reduction has also caused the U.S. to feel uneasy.
Overseas buyers are lining up to reduce their holdings of U.S. dollars. At this critical time when the U.S. is lowering interest rates, it seems a bit like adding insult to injury. However, unexpectedly, the largest creditor of U.S. debt, the Federal Reserve, has also joined in. In August of this year, the Federal Reserve sold $25 billion worth of U.S. debt in one go. The holdings of U.S. debt have dropped by $1.38 trillion compared to the peak in June 2022, which is the lowest level since September 2020.Strange and peculiar, the reason for the United States' interest rate cut is to implement a monetary easing policy, which, to put it simply, is to inject funds and liquidity into the market. It's a very straightforward logic: when interest rates are lowered, the cost for businesses to borrow from banks decreases, making entrepreneurs more willing to borrow money for reproduction and investment. A contradictory phenomenon has emerged: while the Federal Reserve is cutting interest rates, it is also selling U.S. Treasury bonds. This is equivalent to injecting funds into the market with one hand and recovering liquidity with the other. Why does such an absurd phenomenon occur? Essentially, it is due to the $35 trillion U.S. debt.
Federal Reserve Chairman Powell mentioned in a visit in February this year that the growth rate of U.S. debt is too fast and unsustainable. Besides the federal government continuing to borrow new money to repay old debts, the Federal Reserve is also powerless. This indirectly confirms the judgment of Jamie Dimon, CEO of the American capital giant JPMorgan Chase. Before the Federal Reserve's interest rate cut, he stated that regardless of whether the interest rate is cut or by how much, it will not have a significant impact on the U.S. economy because the U.S. has long lost control over its debt.
The second major news is also related to money. After the U.S. interest rate cut, the renowned investment institution Goldman Sachs published a research report stating that the possibility of the U.S. government shutting down due to fiscal expenditure issues in October this year is very high. In other words, the U.S. government may have to close its doors again. This scene seems familiar. At the beginning of 2023, due to the U.S. debt ceiling issue, the two parties in the United States were at odds with each other, almost paralyzing the U.S. government. Even the world's richest man, Musk, has repeatedly stated that the U.S. fiscal problem has penetrated to the bone and is rapidly moving towards bankruptcy.
Goldman Sachs and Musk are not making unfounded claims. On the very day the Federal Reserve announced the interest rate cut, the U.S. House of Representatives rejected the temporary spending bill proposed by the Speaker. The content of this bill was to provide six months of funding for the federal government. The rejection of the bill also means that next month, the U.S. government's fiscal treasury will be empty again.
On the surface, this is a fiscal problem of the government, which has run out of money, but there are too many places to spend money. Essentially, it still stems from the fierce internal struggle between the two parties.
Looking back at 2023, behind many global conflicts, there is the shadow of the United States. The aid funds for Ukraine alone have exceeded 100 billion U.S. dollars. Biden's latest signed 2024 National Defense Authorization Act shows that the U.S. fiscal allocation for various military expenditures has reached as high as 886 billion U.S. dollars,已经超过了二战时期的军费开支.
On the other hand, there is a sharp opposition and intense struggle within the U.S. parties. In November this year, the United States will initiate a new round of presidential elections. Harris and Trump can be described as rivals with a narrow path, encountering each other as opponents. The Democratic and Republican parties standing behind them are also unwilling to yield.
The U.S. government is led by the Democratic Party headed by Biden, but the Republican Party led by Trump holds the majority of seats in the U.S. House of Representatives. The Republican Party strongly opposes the Democratic Party's request for increased funding, and many proposals are not approved, leading to a lack of funding for the Biden administration. Historical data show that the probability of government fiscal deficits during U.S. election years is significantly higher than during non-election years. Undoubtedly, the party struggle during election years is more intense, and the fiscal and debt problems of the United States become more prominent.What do these two pieces of news illustrate? Firstly, the Federal Reserve's move is a fake interest rate cut and a real harvest. Don't be fooled by the significant step of a 50 basis point reduction in one go; the whole world is eagerly waiting for a massive amount of funds to be withdrawn from the United States and enter various markets, at least feeling that they can breathe a sigh of relief. However, it was unexpected that the Federal Reserve still has a trump card up its sleeve—couldn't I just shrink the balance sheet? It's recovering liquidity and making small moves to drive you crazy with impatience.
Secondly, the two major critical issues of "high debt" and "bipartisan struggle" in the United States have already made the entire U.S. government critically ill, and it may not even be curable even if it goes into the ICU.