An ancient Sanskrit shloka states:
अग्निशेषम् ऋणशेषम् शत्रुशेषम् तथैव च |
पुन: पुन: प्रवर्धेत तस्मात् शेषम् न कारयेत् ||
Meaning: Even If a small extent of the fire, a loan, or an enemy continues to exist, then it tends to grow again and again; thus, one should never let any of them continue to subsist even to the smallest extent.
The context of this quote is relevant to every household, community and country. However, the biggest economy in the world thinks otherwise, and so is the myth about that economy.
The leader of the Capitalist world has a gigantic quantum of debt both at the country level and at the household level, and yet its currency is being treated as the safe haven and anointed as the reserve currency over a century ago and continues to dominate economics, geopolitics and scientific, social systems across the globe.
The ratings agency, Fitch, has downgraded the United States’ long-term debt from AAA to AA+. The agency has cited this last-minute debt deal, rising government debt and suspected long-term management as its reasons.
“There has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the ratings agency said in its statement.
Two systems created by it decades back ensure that the US currency is in demand and the interest of the rest of the world in USD remains intact. Read about how the debt crisis in the United States started:
Pact between the House of Saud & the US
It is common knowledge that global energy resources across the globe are settled in US dollars. Every country needs energy or fossil fuel to keep its economy running.
Saudi Arabia is the largest producer of Crude Oil and the leader of the OPEC (Organisation of the Petroleum Exporting Countries) that got into a pact with the United States that it will settle or sell all its Oil and Gas in US Dollars and, in return, the United States will provide protection and security to the Kingdom of Saudi Arabia that is family run. Furthermore, the United States will protect the interest of the House of Saud that control the Kingdom of Saudi Arabia. The story doesn’t end here. The deal inked in 1973 further ensures that petrodollars earned by Saudi Arabia will get re-invested back in US Treasuries (the US government debt), not at competitive bidding but with first right to bid at the US Treasury Issuance rates.
This system thus keeps the demand for the US dollar buoyant with any country needing to buy Oil or gas to have the US dollar despite its underlying strength or challenges.
The Global Oil and Gas market is ~ 6 trillion in size. Over 85 per cent of the market is settled in the US Dollar; thus, the demand for energy keeps the demand for the USD buoyant.
Ownership of US Dollar assets supersedes significantly the US owns other currencies-dominated assets:
The biggest conundrum with the US dollar is the vested interest of global investors and their alignment with the US Dollar. According to IMF data, the US financial obligations, liabilities, and debt that the US government, the US corporations, and the US nationals owe to the rest of the world are ~ USD 53 trillion (to put things in perspective, how big is 53 trillion USD, the total size of the world economy as of 2021 stood at USD 94 trillion).
This debt or obligation is denominated in US dollars. Thus if the US Dollar value plunges the assets or the net worth of the rest of the investors across the globe will also nosedive. Thus keeping the US Dollar buoyant is good economics for large institutions and investors present outside the US, spread across the world. Similarly, US Investors own ~ USD 35 trillion of foreign assets denominated in foreign currency completely. If the dollar depreciates for these US investors, they are well off or better off.
On a net basis, though the United States owes to the rest of the world, the rest of the world has an alignment of interest to keep the US dollar strong.
Two other factors that are a result of the above two anomalies also influence as well as strengthen the position of the US dollar:
1. Efficient Systems, market making, and ease of transaction driven by tech have made the US dollar to be the most traded currency in the world by an enormous lead with 44.14 per cent (nearly half of all currency trades involving the USD) in value terms with Euro trailing behind with 16.14 per cent.
2. The US has the largest quantum of overall national debt amounting to USD 31.4 trillion. Since the US has large borrowing, it needs deep and advanced financial markets to ensure there is no liquidity/ impact cost while placing such large borrowings. Transparency and complete access to information enable the placement of debt with ease.
Thus the hole in the economy enabled the economy to develop the system to perpetuate the hole and keep it rolling against the possible default.
Who finances the debt of the United States?
Rest of the world.
Nearly 60 per cent of the total rainy day reserves across central banks globally are maintained in US dollar or dollar-denominated assets, thus making the US dollar resilient.
The Fuss & Facts
With this prelude, let’s understand what is the fuss about the debt ceiling of the United States, the market was nervous about a few days back.
History in brevity: The debt ceiling is the maximum quantum of money that the United States government can borrow cumulatively by issuing bonds or debt to other countries or private lenders. The debt ceiling was created over a century ago under the Second Liberty Bond Act of 1917 and is also called the statutory debt limit.
The ceiling was then created to regulate the spending of the US government in World War I or European War 1, ensuring that fiscal prudence is maintained by the United States. Since then, the debt ceiling has been raised 78 times (in just over 100 years), virtually losing its relevance as well as its effectiveness.
This hurdle or roadblock to the expansion of borrowing limits was faced by virtually every president of the United States who took the reigns of the country in the last century.
The Present Deal: In the recent deal signed recently, the United States Congress chose not to assign a limit but kept it open to borrowing limitlessly till January 1, 2025 with certain restrictions.
In other words, President Biden for the rest of the term can expand the debt of the United States to any extent if as long as he ticks certain boxes. Some of the terms agreed upon between Democrats and Republicans are as follows:
- Funding to continue for most domestic programs such as rental aid, scientific research, nutritional assistance for mothers etc. and will be separate from Medicare and Social Security allocations.
- Cuts in IRS (Internal Revenue Services) funding to the extent of USD 20 billion.
- Student debt payments and Student Education Loan repayments to resume.
- New work requirements for SNAP (Supplemental Nutrition Assistance Program) whereby adults will be required to work till 54 years of age (20 hours per week) instead of earlier 50 years to receive the food stamps (a voucher issued by the United States to those on low income and exchangeable for food).
With additional debt, that the United States will procure and higher interest rates that currently prevail, it will put pressure on generations to come. The fiscal deficit of the United States in 2022 stood at 5.2 per cent, which is expected to rise to 5.3 per cent in 2023 and next year (CY 2024) it will expand to 6.1 per cent.
The US Economy Vs Indian Economy
Let’s revisit some facts
- The US is the largest economy with ~ USD 25.5 trillion in size whilst India is the fifth largest economy with~ USD 3.3 trillion in size, i.e. 7.8 times.
- The US Government’s debt to GDP stands at ~ 1.23 times whilst for India this number is at 0.54 times.
- The Student Loan outstanding in the United States is USD 1.78 trillion in size whilst the figure in India stands at ~ USD 11 billion i.e. a mammoth 161 times that of India’s student loan outstanding.
The average ticket size of a Student loan in the United States is ~ USD 37,500 whilst in India it stands at 11,000 USD.
As per the US federal data, one in every five US adults is having a student loan and the greatest amount (~ USD 600 billion) is owed by the ones who are between the age of 35 to 49 years, and that is their biggest challenge. At an age where the person should be working to secure the retirement corpus, the individual is still paying for the student loan.
- The average American household debt stands at USD 101k with an average household income of USD 87.8K, thereby pushing many Americans into a debt trap.
The only Saving grace for the US economy is the Gold reserves they hold ~ 8,133 metric tons whilst Germany holds the second largest reserves with 3,355 metric tons of gold and India’s reserves score low with a mere quantum of ~ 800 metric tons of Gold (a tenth of the United States).
This is the single biggest factor that has kept the US economy stable and less vulnerable to people & institutional trust deficit during testing times.
Even if the US government remains to be afloat due to Gold, the average American household will find it increasingly difficult to survive with its debt burden.
“The ancient wisdom that was prophesied in the Sanskrit quote is coming true for American Economy and for an average American family and to top it all, it is colluded, conjoint and combined with materialism, consumerism and capitalism. Until the country and community both realise that Human progress doesn’t mean exploring externally only but finding solutions internally, the debt will continue to surge and will continue to sink the lives of thousands of innocent vulnerable Americans.”
