On May 24, 2024, the United States’ national debt reached an unprecedented $34.58 trillion. This staggering figure represents the cumulative amount borrowed by the federal government throughout the nation’s history. The debt encompasses funds owed to the public, federal trust funds, and other government accounts. The national debt grows annually when government expenditures exceed tax revenues, compelling the Treasury Department to sell securities to the public—bonds, notes, bills, and savings bonds—to bridge the gap. This mechanism is akin to an individual relying on a credit card to cover expenses that surpass their income.
The U.S. dollar’s status as the world’s reserve currency has historically afforded the government the luxury of borrowing with seeming impunity. However, the scenario becomes precarious if major foreign debt holders decide to divest. Such a move could trigger a catastrophic collapse in both government and financial markets. As we witness continuous government spending, market participants are increasingly vigilant, looking for signs of caution and instability.
In January 2024, Japan and China stood as the largest foreign holders of U.S. Treasury securities, with Japan holding $1.15 trillion and China holding $797.7 billion. Other significant holders included the UK, Luxembourg, and Canada. However, China’s behavior towards its U.S. debt holdings has been notably cautious and strategic. Since April 2022, China has steadily reduced its U.S. Treasury holdings, which fell below $1 trillion for the first time. By October 2023, China’s holdings had plummeted to a 14-year low of $769.6 billion, with continuous monthly reductions, suggesting a deliberate shift in its investment strategy. This gradual divestment is attributed to China’s intent to diversify its assets and mitigate risks associated with U.S. bonds, alongside a significant increase in gold investments—a move towards a more reliable and tangible asset amidst global economic uncertainties.
Japan, while not yet engaging in large-scale divestments, faces its own financial pressures. The yen’s depreciation over recent months poses a challenge, prompting speculation that the Japanese Central Bank might intervene. By selling dollar-denominated assets from their reserves, Japan could buy back the yen to stabilize its currency. Although not an immediate threat, a coordinated large-scale sell-off by Japan and China could destabilize the Treasury market.
Concurrently, a noticeable trend among several nations involves investing surplus cash in physical gold. China and Russia have been particularly active in bolstering their gold reserves, an apparent move to shield themselves from reliance on the U.S. dollar. This trend is amplified by geopolitical tensions and a growing distrust of U.S. financial policies, especially after the U.S. and its allies froze Russian assets.
Meanwhile, the global economy faces surging commodity prices driven by heightened demand for raw materials, leading to rising yields. Despite aggressive rate hikes by central banks worldwide, demand remains robust, and economies continue to grow. Many countries are revising GDP estimates upwards, reflecting an optimistic outlook from central banks about achieving a soft landing. However, there is a growing concern that any forthcoming rate cuts might be insufficient and delayed, potentially exacerbating economic instability.
As we navigate these uncharted financial waters, the question looms: Is this the new normal? The combination of staggering national debt, strategic foreign divestments, and shifting global financial allegiances paints a complex and uncertain picture. Market participants, policymakers, and everyday citizens must brace for potential turbulence ahead, preparing for a landscape where financial stability is no longer a given but a goal that requires careful and deliberate action.
