China Cuts $21.3B in US Debt Amid Ongoing US Supply Chain Strains

After World War II, many developed economies around the world have been operating on a high dependence on debt and advance overdraft, which leads to the seemingly enviable "welfare" being unable to withstand the erosion of debt risks. People in many developed economies have become complacent, living beyond their means, and indulging in a comfortable lifestyle. This habit becomes fragile and vulnerable in the face of increased financial risks. Among them, the US economy is particularly evident.

Recently, under the dual pressures of debt and supply chain dilemmas, the US market appears to be in a state of panic. A new development is that, according to a report by US media NewsMax on October 22, as of September 30th, the total budget deficit for the United States in 2021 reached $2.77 trillion. Although it is $36 billion less than in 2020, it is still the second-highest in history. This also indicates that the US economy's advance overdraft and debt addiction seem to be going on indefinitely. To hedge against the huge deficit, the US Treasury will also issue and sell more US Treasury bonds globally.

In response, the US Treasury has been hinting since last year that it may consider issuing 50-year and 100-year US Treasury bonds, a projected cycle far higher than the current longest 30-year US Treasury bond cycle. Although the aforementioned ultra-long-term US Treasury bonds have not been officially issued so far, it further illustrates that today's US economy is almost impossible without debt. However, this is all based on the premise that US debt, as a core asset of the US dollar, has good investment and value preservation value. According to an analysis by the US financial website Zerohedge, as the risks of US inflation and US debt increase, some major central bank buyers may have the possibility of zeroing out US debt. Recently, Gross, known as the "King of US Debt," said that as inflation in the US market reaches 5%, he is heavily shorting US debt.

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If the aforementioned situation continues, it means that the huge US deficit may have nowhere to hedge, and the bottom card of the huge US deficit may face the risk of being exposed. To make matters worse, the inflation crisis caused by the tight US supply chain has been intensifying recently. According to a report by US media on October 22, Jonathan Daniels, chairman of the Florida Port Authority, said that the congestion in the US supply chain may not be resolved until next spring, and it is expected that US prices will continue to rise in the future. Daniels further stated that this supply chain crisis is like "a storm," and "the existing US freight logistics system is simply unable to bear the supply chain congestion that the entire United States is experiencing."

According to an analysis by ABC, a US broadcaster, there are many factors causing the US supply chain crisis, including the increasing resignation of workers (warehouse workers, truck drivers, etc.). The latest data from the US Department of Labor shows that the resignation rate in the United States reached a new high in August this year, with a total of about 6 million people leaving their jobs that month, of which 4.3 million resigned, and the resignation rate reached 2.9%, setting the highest record since the US Department of Labor began tracking this data in 2000. Many Americans have already used up their stock of consumer goods. The latest report from the Global Research Department of US Bank shows that the US supply chain is in trouble, which may deplete the country's commodity inventory in a short period.

Regarding the inflation phenomenon caused by supply chain issues, Isaac Larian, CEO of MGA Entertainment, the world's largest private toy company, said that no matter whether the ports on the West Coast of the United States are working 24 hours or 48 hours a day, you can't find workers. You can't find labor, you can't find trucks, and you can't deliver goods. Larian attributed the port congestion caused by labor shortages to the unemployment subsidies under the US printing press model. US workers would rather stay at home to receive unemployment subsidy checks issued by the stimulus policy than look for jobs. He said, "If you pay them to stay at home, and the money earned at home is more than not being at home, then they don't want to go back to work."

The latest data released by the US Department of Labor on October 13 shows that the US CPI has risen for 16 consecutive months, with a year-on-year increase of 5.4% in September, exceeding the market expectation of 5.3%, and for the fifth consecutive month, the year-on-year increase exceeded 5%, reaching the highest level since July 2008.

Combining the aforementioned long-term dependence of people in developed economies such as the United States on the so-called "high welfare" under the debt deficit model, without striving for progress and unwilling to create value through labor, it can be seen that the current debt deficit and supply chain and inflation crisis risks of the US economy are making this economic model fall into a black hole that is almost a complete loss. Recently, many economists, including former US Treasury Secretary Mnuchin and Larry Summers, have warned that the United States may face out-of-control inflation.

It is worth noting that the Federal Reserve's balance sheet has reached a new high of $8.3 trillion, and as of October 23, the total US federal debt has also accumulated to a new record close to $29 trillion. The total debt in the US financial market has reached about $86 trillion. Obviously, the huge debt and money printing of the US economy and market have directly exacerbated the aforementioned debt and inflation consequences. Keynesianism is not omnipotent, and it is impossible without debt and deficit, but too much debt and deficit, over-reliance on debt, and excessive advance overdraft will become fragile and vulnerable when unforeseen situations such as the sudden emergence of virus risks occur.

Jim Rogers, the "Commodities King" of Wall Street and billionaire, has warned more than once that the United States is burdened with the world's highest debt, and it is full of debt, which will eventually pay the price. US Treasury Secretary Janet Yellen has also warned many times recently that even if the debt ceiling is ultimately raised in the future, the US Treasury bond market also faces uncertain risks. At this time, the biggest short seller and behind-the-scenes promoter of US debt may also be emerging.According to the latest released Federal Reserve September meeting minutes, the Fed may start to reduce the pace of monthly asset purchases before mid-November. It is expected that the Fed will gradually decrease the monthly bond purchase of $120 billion. In addition, the target date for ending purchases is expected to be mid-2022. Not only that, regarding whether to continue purchasing U.S. Treasury bonds, Powell said that the Fed really does not want to do this. Once so, the Fed, as the largest buyer of U.S. debt, may become the largest short seller of U.S. debt.

In fact, the Federal Reserve is not the Federal Reserve of the U.S. economy; it is a consortium of many banks in the United States. The ultimate goal of the Fed is almost to take back the money put out and obtain wealth arbitrage. In this regard, Rogers analyzed that once so, the initiative of whether the U.S. debt deficit model can continue is in the hands of some major central bank buyers around the world.

It is worth mentioning that, according to the latest International Capital Flow Report released by the U.S. Department of the Treasury on October 19 (there is a two-month delay in the official data of U.S. debt), China significantly reduced its holdings of U.S. debt by $21.3 billion in August, bringing the holdings down to $1.05 trillion. However, China remains the second-largest overseas holder of U.S. debt (second only to Japan in terms of holding scale). Since U.S. debt is backed by the U.S. dollar as a reserve currency, it has always been regarded as a risk-free bond by the market.