United States Government Debt Ceiling Crisis
Roadmap towards comprehending how the United States government has gotten to the current government debt ceiling crisis.
The 2023 United States debt ceiling crisis is not the same as the one in 2011. In 2011, the United States avoided government default due to closed-door dealings with China.
(...) "closed-door negotiations with Chinese leaders to write off the $1.14 trillion of American debt currently held by China in exchange for a deal to end American military assistance and arms sales to Taiwan and terminate the current United States-Taiwan defense arrangement by 2015." (...)
Those closed-door dealings stipulated that the United States would end American military assistance and arms sales to Taiwan and terminate the current United States-Taiwan defense arrangement by 2015, which the United States didn’t do, which made China reduce United States government Treasuries in late 2015.
Over time, China’s United States government Treasury holdings have fluctuated, mostly due to geopolitics. In 2020 and 2021, when China warned the United States government that they wouldn't support the United States government Treasury market and they would sell United States government Treasuries if they continued to support Taiwanese separatists, the United States government did not care; in fact, they sent Nancy Pelosi to Taiwan, which made China and Japan reduce exposure to the United States government Treasury market in 2021 and 2022. This year, China has aggressively been selling United States government Treasuries, given geopolitics and the BRICS alliance's future goals of fully de-dollarizing the BRICS alliance in preparation of the forward World War.
Given such scenario, the United States government has no alternative but to either collapse the United States dollar by defaulting or restore the gold standard through the H.R.§2435, as China doesn’t back the debt ceiling raise but rather is aggressively reducing exposure to United States government Treasuries due to the previously mentioned reasons.
Overall, the United States economy is behaving way above Americans' expectations, with inflation statistics showing deflation, as explained before, and employment data remaining strong. What complicates the monetary policy soft-landing path is the United States government default, as explained before, but monetary policy can't do nothing but wait for Congress to pass a resolution, as monetary policy doesn't have the tools to resolve the current United States government debt ceiling crisis without causing more inflation, as the United States dollar can't devalue further than it already has due to fiscal policy expansion given by the United States previous administrations. As both Republicans and Democrats have agreed that government default is a "must not happen" and "not an option", they both have two options on the table: the H.R.§2435 or reduce government spending towards matching receipts from taxes and outlays from spending, allowing the government to keep functioning from global trade and by tax receipts rather than by perpetual debt ceiling raises that devalue the dollar, which would also allow to reduce the government deficit.
The forward expectations over monetary policy remain the same, but a rate hike pause might be appropriate after two more interest rate hikes, which is what the market is pricing, while increasing the pace of Quantitative Tightening as it can replace rate hike increases until after inflation gets to the 2% target. The higher for longer interest rate stance is expected to remain as long as the Federal Reserve’s dual mandate doesn’t get affected, which is not expected to change as the employment data keeps a strong trend, thus not making monetary policy focused on maximum employment but rather on price stability. As Jerome Powell said, "Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone.", which is correct; thus far, the sof-landing path remains stable, which is why Congress must pass a solution as soon as possible given the small timeframe that the government has to address the government debt ceiling crisis.
Folks, if the government defaults, all the progress made by the Biden Administration in the economy and the progress made by the Federal Reserve over inflation will be in vain, which would be quite disastrous as it would weaken the United States economically and reduce its strategic advantage over other nations, which, given the geopolitical tensions, the government must choose wisely. Looking at the forward World War, which is vectored by Taiwan, the United States must choose not to reduce its advantage over other nations by defaulting. Over Taiwan, cutting the main supply of semiconductors in the West by taking Taiwan makes the West weak, which is a strategic advantage that China seeks. Without semiconductor supplies from Taiwan, the Western nations would crumble within months. Given the fact that without semiconductors, you can't make technology nor repair anything that uses chips, this includes any car, plane, or ship that has any kind of chip issue that won't be repaired once China takes Taiwan. China taking Taiwan means that the West loses the technological lead, and the West must never forget what made the Second World War end ( the technological lead over another nation and the use of that technology ). More than 70% of the chips that are on cars, planes, and ships in the West are made in Taiwan; once that supply is cut, the West crumbles within months because the West won't be able to repair ships, cars, and planes, which will be key during the forward World War, while China and their allies will be able to do so. It's a strategic advantage that China seeks, apart from regional interests, given the One China Principle. As explained before.
To conclude, there will be a post this weekend updating the previous analysis.
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