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Mounting Debt Under Trump to Prompt China to Further Cut U.S. Treasury Holdings

Dec 15 , 2016
  • Zhou Shijian

    Senior Fellow, Tsinghua Center for US-China Relations

Since the beginning of the new century, US treasury bonds have been issued rapidly on a huge scale and the situation is severe.

In the eight years of the George W. Bush Administration, US bonds accumulated to $4.9 trillion, not including the $5.7 trillion in bonds accumulated by previous presidents. On January 19, 2009, Bush handed over a big fiscal hole of $10.625 trillion to President Obama.

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Obama took office at the time of a great recession. It was urgent to take emergency measures of expansionary fiscal stimulus so as to prevent the US economy from sliding into a great depression. To raise funds through the issuance of a large number of bonds, Obama accumulated $5.089 trillion financial deficit in his first term. By December 1, 2012, the US treasury bonds reached a new high level of $18 trillion. In his second term, Obama accumulated an additional fiscal deficit of $2.189 trillion. By the end of September, 2016, the US bonds amounted to $19.7 trillion dollars (with an average of $61,600 dollars per capita, equivalent to RMB419, 000). In 2015, the US debt accounted for 107.6% of the $17.94 trillion GDP, well over the 60% international financial warning line. The annual interest on treasury bonds to be repaid by the Federal government is $1.7 trillion. Ben. Bernanke, former chairman of the Federal Reserve, pointed out that by the fiscal year of 2020, the Federal government would have to raise $814 billion to pay the bond interest, amounting to one-tenth of that year’s government budget.

The US treasury bond stockpile grows fast. In the 204 years from the founding of the states in 1776 to the last year of President Carter’s Administration in 1980, the US bonds arrived at a total of nearly $1 trillion ($907.7 billion). In the 27 years from 1981 to 2008, the bonds rose to $9.72 trillion. In the eight years of the Obama Administration from 2009 to the end of 2016, the US bonds will have increased from nearly $10 trillion to $20 trillion.

Faced with the huge debts, President Obama announced that he would cut his $400,000 dollar annual salary by 5% on March 1, 2013. All the cabinet secretaries volunteered to follow his suit.

In 2014, the US Congress passed the Foreign Account Tax Compliance Act to severely crack down on tax evasion by the US enterprises and residents overseas. $200 billion tax was said to be recovered every year.

In 2012, President Obama pushed Congress to slash military spending. The $664.3 billion military spending in the 2012 fiscal year was cut down to $545 billion by the 2015 fiscal year, but it was increased to $596 billion later. In the 2016 fiscal year, military spending again reached $600 billion due to anti-terrorism needs in the Middle East.

Starting from 2013, the Obama Administration raised the tax on families with over $400,000 annual income to 39.6% from 35%.

These are entirely inadequate measures in face of such a huge debt. The US government mainly relies on issuing new debts to repay the old. Sooner or later, the US will find no market for its bonds. Failing to roll over the debts will trigger an unparalleled debt crisis.

President-elect Trump will focus on boosting the economic development when he takes office. The main measure will be a heavy reduction of tax. He says he will push for corporate tax to go down from 33%to 15% and taxes on the rich from 39.6% to 30%. Consequently, the Federal government’s tax income will substantially fall and fiscal deficit will soar. American economists predict that in Trump’s first term, US debt will skyrocket by $10 trillion dollars and as much as $30 trillion by the end of 2020.

How to repay such a huge debt? American financial expert Robert D. Arnott with the US Research Affiliates said in January 2010 that the US was very likely to have a technical default via inflation. It means that those countries that have lent money to the US may only have a partial repay. He said this was an act of theft but it could become a reality.

US bonds are now being sold out by central banks at the fastest rate ever. In the first half of 2016, the net sale of US bonds by the central banks in the world numbered $192 billion, twice that over the same period in 2015. US Treasury data show that the sale of US bonds on such a large scale hit an all-time high for 40 years. Foreign media report that the global central banks sold off $346 billion in US bonds in the first eight months of 2016.

One-third of the US bonds are held overseas; for many years, China has been the biggest holder. In November 2013, China held US bonds exceeding $1.316 trillion, which fell to $1.258 trillion in November 2015, accounting for 20.64% of the US overseas debts of $6.125 trillion dollars. In September, 2016, China reduced its holding of US bonds to $1.157 trillion, accounting for 18.67% of the US overseas debts of $6.196 trillion dollars.

Bloomberg News reported on June 16, 2016 that from 2014 to the end of March in 2016, China reduced its US bond holdings by $250 billion. According to US Treasury statistics, China reduced US bonds by $22 billion dollars in July 2016, $33.7 billion in August and $28.1 billion dollars in September, totaling $83.8 billion dollars in three months.

China should continue the reduction of the US bonds, leaving Japan as the first biggest creditor for the US.

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