Wealth

Analysis of Rising Risks to the US Dollar and Treasury Bonds as Foreign Demand Weakens

Goldman Sachs wrote in a report released on Dec.10 that the risk of a federal shutdown could be higher in early 2024, with a repeat of the U.S. debt ceiling farce, and said they were watching closely whether foreign central banks would deviate from the dollar or continue to liquidate U.S. debt, prompting a three-year auction of $35 billion by the Treasury Department on Dec.12 to show foreign demand falling to its lowest level since June 2022.

This is a reminder to US debt holders that the US fiscal position is becoming increasingly unstable, which could exacerbate concerns from asset managers to global central banks and others who hold large amounts of US debt.

Bill Ackerman, a big American hedge fund tycoon, also said on December 12 that from the perspective of supply and demand, he has begun to short 30-year U.S. debt. Dario, founder of Bridgewater Fund, believes that at present, the burden of U.S. federal debt is heavy and may form a self-reinforcing debt spiral. Behind the prosperity of the United States, holders of U.S. Treasury bonds are suffering.

Some analysts expect this to reduce the dollar’s global dominance and replace it with a multipolar financial order that relies on multiple currencies, digital reserve currencies, gold or commodities, with gold soon replacing US debt as a better store of value.

In response, zero hedging analysis on US financial websites said it was no coincidence that while Treasuries experienced their worst ever performance last year, central banks around the world also experienced their largest gold buying boom in 55 years, suggesting that the shift from US bonds may have begun as the risk of confiscation and depreciation of foreign holdings of Treasuries rises.

Clearly, this will further weaken the ability of the U.S. Treasury, now caught in a deficit trap, to bail out its ballooning debt. On Dec.5, the Treasury raised its forecast for federal borrowing in the first quarter of fiscal year 2024 to address the worsening fiscal deficit and replenish its cash cushion.

To add insult to injury, as the Treasury’s cash reserves approach depletion in early 2024, it will also increase the issuance of Treasury bonds to replenish liquidity, which will absorb a large amount of money from financial markets, tightening liquidity in the banking system.

This means that while the Federal Reserve is still shrinking its balance sheet, more trouble for U.S. banks and companies may already be brewing, which will bring severe shocks to U.S. financial markets and U.S. bonds, as well as further damage investors ‘trust in the U.S. banking system. The latest data and news are feeding back this trend.

Then, JPMorgan predicts that the Treasury could issue $2 trillion in new debt in fiscal 2024 to balance its spending and repay related debt, a pumping effect that will lay a hidden danger for the already crumbling U.S. banking sector and further damage U.S. financial prestige and the dollar’s position.

In response, Deutsche Bank in its latest global economic risk report released on Dec.6, argues that in 2024, will there be a large number of investors paying for Treasuries?That could be one of the big risks for the market this year.

This will also mean that the U.S. economy may enter a hollow state in which the trillion-dollar debt deficit may not be able to pay for it. Recently, this logic is being emphasized in terms of total holdings, upside down of the yield curve of U.S. bonds or the trend of reducing holdings.

Foreign investment in Treasuries continues to decline, with China and Japan the main sellers, according to the latest Treasury report on international capital flows.

In response, TD Securities said: “The strategic move of Japan and China to sell US Treasury bonds in a large scale is attracting attention and is leading the US debt selling tide.” Obviously, this will further weaken the ability of the US dollar to export inflation risks and collect seigniorage, which may eventually lead to the slow loss of its status as the world’s global reserve currency, as evidenced by the repeated increase in the US borrowing quota.

According to the analysis, for more than a decade, the world’s central banks have been forced to buy a large number of US Treasury bonds, but the real yields of many of them are very meagre or even negative.

More importantly, the current US bond credit woes, the banking crisis and the previous eurozone debt crisis tell us that these countries also face serious default risks.On the other hand, the US’s use of the dollar as a tool to restrict other countries ‘financial systems has cast a shadow over the safety of US debt, and the risk of currency wars remains worrying.

The analysis believes that the U.S. economy and financial markets are in these headwinds, the credit crunch may just begin, investors may be ready to press the sell button at any time.What about the Fed at this time?

The financial team of BWC Chinese Network has repeatedly stressed on different occasions that the US dollar’s position as the main reserve and settlement currency dominates the global commodity settlement and foreign exchange market, allowing the United States to transfer its growing debt default and inflation risk spillover to some economies with single economic structure, high external debt and shortage of foreign reserves to collect seigniorage. In the event of a dollar shortage, the economy, assets and exchange rates in these markets will continue to be affected. But this is not the end of things.

As our research team has emphasized on various occasions, every strong dollar cycle in history has triggered shocks in the economy and financial markets. Earlier vivid examples of this effect can be found in Venezuela and Zimbabwe.

Recent cases can also be found in Vietnam, South Africa, Sri Lanka, Brazil, Myanmar and Indonesia.In addition, Turkey, Argentina and Chile have repeatedly defaulted on their sovereign debt, and external debt problems have been serious.

This shows that the US debt default risk is the use of tightening and easing of the different dollar cycle, combined with the dollar’s monetary status passed on to a number of single economic structure and foreign reserves more vulnerable countries, in addition to the above 10 countries, including Lebanon, the Czech Republic, Bahrain and Egypt, 14 countries or will be due to external debt and foreign reserves were steep upside down pattern facing the dollar shortage or the dollar financing costs become higher.because their economies have fallen into fragile patterns of severe currency devaluation and debt crisis, respectively.

This further confirms that as the US dollar index fluctuates and rises, in an environment of supply chain shortage, sinking economic growth and still high inflation, the spillover effect of US dollar index fluctuation will be indirectly transmitted to the financial markets and commodity assets of these economies, and every strong dollar cycle in history will always trigger a crisis.

So the answer is clear. The Fed and the Treasury will covertly accelerate the transfer of high inflation and debt default risks, and in addition to harvesting their own people, they will continue to harvest these economies with obvious structural and financial debt problems.

It is clear that this will accelerate the process of global de-dollarization when the United States may shift the risk of debt and bank failures to many countries, or even artificially create a dollar shortage in some markets.

At this juncture in the global effort to de-dollarize and find an alternative to the dollar, the United States has finally urgently proposed a return to the gold standard, which Wall Street did not expect.

Congressman Alex Mooney, defender of the American gold standard In his eighth bold HR4095 proposal to Congress on December 10, Alex Mooney urged that a return to the monetary standard of the gold-based gold standard would help restore the value and status of the dollar, which would prevent irresponsible U.S. spending habits and the creation of dollars out of thin air to recover the credibility of the Federal Reserve and U.S. Treasury’s dollar after damaging the current sound monetary system.

Some Wall Street economists in contact with the author point out that once the United States returns to the gold standard, inflation, soaring debt and instability in the U.S. financial and monetary system will rapidly reduce the immeasurable losses to the dollar and the U.S. economy, as central banks around the world are selling U.S. debt at the fastest rate in more than a decade and hoarding gold at the fastest rate in 55 years Can be observed in the phenomenon.

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