Is the U.S. global financial pyramid threatened?

The Republican-controlled U.S. House of Representatives and the administration of Democratic President Joe Biden have not yet reached an agreement on raising the U.S. debt ceiling.  According to U.S. Treasury Chief Janet Yellen, the prospect of a default “risks undermining U.S. global economic leadership and calls into question our ability to defend national security interests”.

According to Yellen, if the U.S. Congress and the White House fail to raise the $31.4 trillion legal limit on federal debt, the Treasury Department could begin skipping its bond payments as early as June 1. In turn, even if the U.S. government postpones payments by a few hours, this would significantly undermine investor confidence in U.S. bonds.

The U.S. government debt problem has already had an impact on Washington's foreign policy: President Joe Biden canceled a series of foreign policy visits to the Pacific region, which is crucial to U.S. interests, and reduced his presence at the G7 summit. The U.S. public debt situation itself shows how dangerous U.S. financial hegemony is to the world.

What is the U.S. public debt?

The U.S. public debt problem boils down to this: in recent decades, the U.S. government has literally lived on debt, covering its budget deficit with borrowing. U.S. budget spending is so high that it is not covered by the country's real economy. The U.S. Treasury issues different types of debt to raise money. Debt obligations have different owners.  Half of the national debt is held directly by the U.S. government and the Federal Reserve (Fed). In essence, Washington lends this money to itself and receives interest on the debt, backing it up with the issuance of the dollar alone. The result is inflation.

The other debt is held by foreign holders, particularly Japan, China and the United Kingdom. Russia also reduced, but did not completely abandon, its investments in U.S. debt securities, even during the ETR. But to pay the interest on these bonds, Americans must sell new debt securities, thus increasing the national debt ceiling. According to TASS, the U.S. national debt has long exceeded the country's GDP and will exceed 136 percent of GDP by 2025.

Created by Congress in 1917, the debt limit (or ceiling) sets the maximum amount of outstanding federal debt that the U.S. government can take on. In January 2023, the total national debt and the debt ceiling will be $31.4 trillion. Since 2001, the U.S. federal budget has averaged an annual deficit of nearly $1 trillion, which means it covers these costs with debt alone. The ceiling is usually raised when necessary (usually when past interest payments on the national debt are needed) by passing an amendment to the federal budget law.

In reality, this is a global pyramid scheme involving the whole world. If the buying and selling of bonds were to stop, the United States would not be able to pay the interest and the whole system would collapse.

What is happening in the United States?

In January 2023, the national debt has already exceeded the statutory ceiling of $31.4 trillion. The Treasury Department has taken some emergency measures, such as freezing some budget expenditures and rescheduling them, in the hope that Congress and the executive branch will agree to raise the ceiling.

However, since Congress is now controlled by Republicans and the executive branch by Democrats, the national debt issue has become a matter of domestic political bargaining. Congress, as part of a possible deal with the executive, is calling for cuts in some spending, especially in the social sector. The Biden administration would like to reduce tax loopholes for entrepreneurs, leave social spending untouchable and partially reduce military spending. In this way, each side plans to avoid having to borrow money again: cut some “unnecessary” spending and find new revenue.

The Republicans, who need the votes of the business class and middle class and are supported by the nation's big business in the 2024 presidential and congressional elections, are opposed to a stricter fiscal function of the state. On the other hand, they are eager to cut social spending because the payments go mainly to the Democratic Party electorate, especially the black minority. That is why, among other things, Republicans plan to tighten requirements for recipients of public cash assistance, food stamps and the Medicaid health program.

Joe Biden's plummeting popularity, on the other hand, leaves Democrats with the only chance to win: literally bribing some of their electorate by giving them more money and benefits (or at least promising them). Hence the fantastic “reparations for slavery” plans now proposed by the U.S. Democratic Party. However, increased social spending in the face of signs of economic recession can only come at the expense of borrowing money again (even buying the national debt from themselves, that is, turning on the “printing press”).

Moreover, the multi-billion dollar “aid packages” to Ukraine must also be paid for. The impasse with the debt ceiling makes the allocation of new funds at least questionable and postpones them. The same goes for other urgent government spending.

In April 2023, the Republican-led House of Representatives passed a bill suspending the debt ceiling in exchange for federal spending cuts of nearly 14 percent over the next decade.  Biden threatened to veto the measure. Several rounds of negotiations have taken place since then, but no final agreement has been reached. Despite White House statements about the “productive” nature of the negotiations, Republicans aim to “squeeze” their rivals by forcing them to make maximum concessions. Thus, on May 23, the speaker of the House of Representatives in Congress advanced the responsibility for a possible default to Biden:

“Democrats still have 9 days to meet the deadline, but given that President Biden has ignored this debt crisis for over 100 days-don't get me wrong-any default would be a default by Biden”.

Theoretical implications

For a polarized America, the issue of national debt is a matter of economic leverage that would allow one force or the other to take power next year. Negotiations are therefore delayed. But the theoretical consequences of default - America's inability to pay its debts - are so devastating that a compromise, even if only temporary, is inevitable.

A U.S. default would lead to a huge global economic crisis. The United States itself would permanently lose the confidence of the rest of the world, its liabilities and its dollars would be devalued. The United States would face an economic recession, millions of people would lose their jobs, and the government would be forced to cut spending or redirect it to debt repayment to save its reputation on the international stage.

As the globalist “Council on Foreign Relations” (CFR) notes, “A U.S. default could wreak havoc in global financial markets. The creditworthiness of U.S. Treasury securities has long supported demand for dollars, contributing to their value and maintaining their status as the world's reserve currency. Any blow to confidence in the U.S. economy, be it a default or the uncertainty surrounding it, could force investors to sell U.S. Treasury securities, thus weakening the dollar”.

But dollar-linked economies around the world would also suffer negative consequences in the form of capital outflows (due to reduced investment), accelerating inflation and the possibility of depreciation of their national currencies.

“But one country's economic tragedy is another country's golden ticket”, warns the U.S. publication Foreign Policy, “fearing U.S. sanctions, Russia and China have long sought to replace the dollar with the yuan, <...>the so-called BRICS countries are considering creating a common currency to accelerate dedollarization. A sovereign debt default could be enough to convince third countries that the United States is not trustworthy and that their economies are better off investing in Moscow and Beijing”.

Crisis outlook

However, even assuming an agreement is reached on the U.S. public debt ceiling, crisis trends will persist.

The Congressional Budget Office predicts that net interest payments on the national debt will exceed defense spending by 2029. And in just ten years, interest payments are projected to account for 3.6 percent of gross domestic product, compared with 2.8 percent for defense. This figure is worrying for U.S. neoconservatives and the MIC lobby. They oppose any agreement that could even theoretically lead to a cap on military spending, including spending on “Ukraine”. However, in such a case, the U.S. in the long run would have to spend budget funds mainly to pay off debts and costs of military operations.

The CFR suggested considering the national debt ceiling as an “archaism”. But this leads to an uncontrolled increase in public debt payments.

As Russian presidential advisor Sergei Glazyev points out, “this financial pyramid can grow without catastrophic consequences as long as there is market demand for these bonds, especially from abroad”. After the seizure of Russian reserves, there are fewer and fewer people willing to buy these toxic bonds. When the Fed remains the only buyer, all the issues will go to inflate inflation in the United States. This is already happening.

The solution: de-dollarization

The wickedness of the system itself, in which the whole world finances its enslavement - U.S. hegemony - by buying U.S. government debt or backing the dollar, which allows Americans to live on emissions, is obvious.

It is also economically dangerous. As U.S. public debt grows, the issue of possible default becomes more and more active. Over the next decade it will become unprofitable for the United States to pay off at least some of its debts. And they will stop doing so, citing, for example, political factors, as has already happened with Russian foreign currency assets located abroad. The only way out for the rest of the world is de-dollarization, not investing in U.S. securities and reducing dollar-denominated transactions. The sooner the nations of the world disengage from this system, which is heading for imminent collapse, the better their chances of survival.

The fact that political contradictions between Democrats and Republicans in the United States are endangering the entire world economy should be an added incentive to abandon the dollar and seek new solutions-alternative world currencies, currencies or baskets of currencies and commodities. Internal contradictions within the United States will only exacerbate these risks in the future.

Translation by Costantino Ceoldo