The issue of U.S. debt negotiations is becoming an increasingly significant topic, and I would like to summarize it.
During World War I, the Allies engaged in fierce battles against Germany on land and at sea. The confrontation between the British and German fleets was particularly prominent at sea, and during this process, German U-boats played a significant role. The U-boats effectively blockaded Britain by attacking not only military vessels but also merchant ships with torpedoes in the waters surrounding Britain. This incident had a crucial impact on the course of the war and provided clues that could be linked to the debt negotiations situation.
On May 7, 1915, the British passenger ship Lusitania was sunk by a German U-boat while heading for Liverpool. About a thousand passengers lost their lives in this incident, including 128 Americans. This caused a great shock and anger in the United States, leading many to advocate for joining the war.
This situation significantly altered America's neutral policy. The sinking of the Lusitania prompted the United States to decide to participate in the war. However, according to U.S. laws at the time, the government needed congressional approval to spend a specific budget. This created difficulties in quickly allocating the funds necessary for the war.
As a result, the requirement for passage through both the House and Senate caused significant delays and difficulties in conducting the war. This complex situation implied that the U.S. faced multiple challenges in the process of participating in the war.
During World War I, the United States faced budget issues, reflecting this situation, there were amendments to budget-related laws in 1939. This amendment led to the introduction of the national debt ceiling, which brought significant changes to the government's fiscal management.
The original purpose of the national debt ceiling was not to restrain excessive government spending. Rather, it aimed to allow the government to spend more easily within certain limits. Through this, the U.S. government began to use debt almost like a loan, managing its finances flexibly.
After World War II, the national debt ceiling was used for congressional control. It became a tool to regulate excessive government spending and contributed to enhancing the stability of national finances. This change reflects the complex situation in which the U.S. government seeks both flexibility and limits in its fiscal operations.
This system was designed to grant discretion to the executive branch, but if the set limit is exceeded, Congress must approve a new limit. Therefore, exceeding the limit does not immediately lead the U.S. to default.
However, it means that the U.S. government cannot issue treasury bonds, limiting the actions of the Treasury and the Federal Reserve. From 1960 to the present, the U.S. Congress has raised the debt ceiling a total of 80 times, indicating a continuous recognition of necessity in fiscal management. This process has become a significant milestone in the financial aspects of the government.
The increase in the debt ceiling is closely linked to the political situation. In periods of Republican dominance, it has increased 49 times, and during periods of Democratic rule, it has increased 31 times, but these increases have occurred irrespective of the tendencies of specific parties. Both parties tend to utilize the increase of the debt ceiling to achieve their political goals.
In particular, the wall construction between the United States and Mexico, which was highly prioritized during President Trump's first term, is viewed as a case that could not be executed because the Democrats linked it to the debt ceiling and budget planning. Although the debt ceiling has been adjusted more than 80 times, it often does not proceed smoothly when divided government overlaps.
In 2011, after reaching the debt ceiling under President Obama, the Republican Speaker of the House escalated the negotiations to an extreme situation. As default loomed, the U.S. stock market fell approximately 17% over 15 days, and S&P downgraded the credit rating of U.S. government bonds from AAA to AA+. Along with this significant drop in stock prices, the price of gold, seen as a safe asset, surged. Ultimately, a dramatic agreement was reached between the government and the House of Representatives just two days before the default.
Additionally, when the national credit rating of the United States was downgraded, South Korea's KOSPI index fell by 17% over the course of a week. This situation led to a series of economic phenomena where the preference for safe assets increased, the price of gold rose, and the value of U.S. government bonds decreased, resulting in rising interest rates. Such events clearly illustrate the complexity of resolving the debt ceiling issue.
The debt negotiations have emerged as an important issue in 2023. If the negotiations do not conclude and the default deadline approaches, gold prices and treasury yields will rise, and the stock market will experience significant declines. Such a situation signifies a serious crisis for investors.
In August 2023, as negotiations were concluding, the global credit rating agency Fitch downgraded the U.S. national credit rating from AAA to AA+. Fitch cited the rising national debt burden and anticipated financial deterioration as primary reasons. This can be viewed as a decision reflecting concerns about the U.S. government's financial soundness.
In the political arena, there has been extreme confrontation over the issue of raising the debt ceiling, and resolutions tend to occur at the last moment. This repetitive situation has caused anxiety among many people.
On May 29, 2023, when the Treasury's TGA, which is a negative balance account, was nearing depletion, President Biden and House Speaker McCarthy reached an agreement to extend the debt ceiling until January 1, 2025. This was a measure to avoid imminent default, contributing to alleviating immediate financial risk. The outcome of future negotiations remains uncertain, making it essential to closely monitor these issues.
The agreed terms primarily consist of matters related to the debt ceiling and government spending. While the debt ceiling is set to increase over the next two years, government spending will be restricted to previously agreed figures. Discretionary spending in non-defense areas for 2024 will be frozen at the same level as 2023, and in 2025, this amount will only increase by 1%.
In summary, while the debt ceiling will increase, government spending related to non-defense in 2024 will remain constant, with a slight increase in 2025.
Meanwhile, the U.S. government secures necessary funds using an account called TGA, which is operated by the Federal Reserve. This account can be understood as akin to a personal checking account. For example, if a person has 75 million won in their checking account but spends more than what is in their income, they would use loans to cover the deficit.
If this hypothetical person has 75 million won in their checking account and the balance decreases, they would live by borrowing to cover the shortfall. However, if the bank does not increase the lending limit, their checking account balance could decrease to 5 million won. This situation can be understood in a context similar to government fiscal management.
Once the balance falls to 5 million won, late payments such as credit card dues begin. The day the balance reaches 0 was June 5. Thanks to the agreement made on May 29, we barely managed to resolve the problem before that day.
When the debt ceiling is raised, the next necessary step is to restore the balance of the account for living expenses back to normal. The goal is to replenish the balance to 75 million won, but to achieve that, simply getting a loan of 75 million won will not be enough.
Ultimately, since expenditures exceed income, it would require a loan of over 100 million won to secure a deposit balance of 75 million won. In the U.S., this method allowed for a considerable cushion of over 100 million won in loans before the end of 2023.
In the context of the above, if the figure of 10,000 won is converted to 1 billion dollars, the situation could be better understood. Meanwhile, it is also noteworthy that the U.S. primarily issues treasury bonds as a method to supplement the TGA. This process suggests that both the state and individuals must endeavor to maintain financial soundness.
Generally, when something is abundant, its value tends to decrease, while a higher degree of scarcity tends to drive prices up. This principle also applies to U.S. treasury bonds, especially when the U.S. Treasury issues them on a large scale to fill the TGA, increasing the supply and thus lowering bond prices. A decrease in prices means that treasury yields will ultimately rise.
In particular, during a time when rates climbed to 5%, the U.S. Treasury's TGA account was empty, and actions taken to fill it had a significant impact on treasury yields.
The suspension of the debt ceiling agreed upon in 2023 will end on January 1, 2025. Therefore, the U.S. debt ceiling is expected to be reset to 36 trillion 21 billion dollars as of January 2, 2025. After this date, the debt cannot be increased further.
Starting in January 2025, the TGA balance will begin to decrease rapidly, having already halved from its high of 800 billion dollars. These changes are expected to significantly impact the future financial situation and interest rates in the U.S.
Currently, the Treasury is postponing funding for public pensions and funds, and is not engaging in essential spending. However, the limits for sustaining this method are gradually approaching, and the Treasury's resources are now almost depleted. It seems that the Treasury will have to rely on the TGA (cash management account) until the negotiations for raising the debt ceiling are complete.
In March and April, income tax revenues will come in, so the situation might be manageable, but starting in May, TGA funds are expected to begin rapidly decreasing. If the current trend continues, the TGA balance may be close to depletion by June or July. This suggests that there could be a temporary reduction in government bond issuance while the debt ceiling negotiations are in progress in June, which may increase the scarcity of government bonds. However, it is essential to note that this is not a permanent situation.
If the debt ceiling negotiations proceed urgently and negatively impact the creditworthiness of the United States, it could lead to a situation where treasury prices fall and interest rates rise. If investors begin to shy away from treasury bonds, demand will drop, leading to falling prices and rising interest rates. For instance, when the credit rating of the United States fell in 2011, the yield on 10-year treasury bonds suddenly rose from 2% to 3%.
After the debt ceiling negotiations conclude, large-scale issuance of treasury bonds to replenish the TGA is expected. Currently, as the Republican Party holds a majority in both the House and Senate, there is a likelihood that the negotiations will proceed more smoothly than before. However, since the debt ceiling is closely related to local budgets, even Republican members may respond differently based on the interests of their own districts.
Trump signed a temporary budget plan excluding the debt ceiling over the weekend to prevent a government shutdown. Although the debt ceiling remains fixed, budget execution is still possible. Some Democrats judged that if a shutdown occurs, it would provide justification for Trump to lay off government personnel, leading them to shift their stance to approval over the weekend, and ultimately it passed in the Senate. Trump opposed passing the temporary budget without including the debt ceiling, but after it passed in the Senate, he immediately approved it.
The debt ceiling negotiations are still ongoing, and if an agreement is not reached and it leads to a game of chicken, it could have adverse effects on the U.S. stock indices and treasury prices, while gold prices may rise.
