We can think from a different perspective: how to resolve the U.S. Treasury bond crisis without lowering rates?
For friends who find it hard to read, the conclusion is at the end.
📌 Core of the issue
The essence of the U.S. Treasury bond issue is that debt is growing too quickly while the economy cannot keep up, along with high interest and inflation. The current scale of U.S. Treasury bonds has exceeded $36 trillion, with interest expenses alone accounting for 25% of fiscal revenue (2024 fiscal revenue is $4.919 trillion, and U.S. Treasury bond interest is about $1 trillion). If interest rates remain high, it will create a vicious cycle.
🔑 How to resolve it without lowering interest rates?
1. Fiscal Reform
Reducing the deficit; the current U.S. fiscal deficit accounts for 7.5% of GDP. If it can be reduced to below 3%, the pressure will be much less. We can refer to the practices during the Clinton era, saving expenditures by cutting military spending, reforming healthcare, and eliminating some unnecessary subsidies. The timing of @elonmusk's @DOGE appearing here is also quite coincidental.
2. Debt Management
Issuing ultra-long-term Treasury bonds, even for 50 years? Locking interest rates at current levels. The proportion of 30-year Treasury bonds is still less than 8%, leaving plenty of room for operation. At the same time, the Federal Reserve can selectively purchase long-term Treasury bonds in the market, pushing the yield on 10-year Treasury bonds below 3.5%.
Japan has done this (YCC), and the effect has been pretty good, reducing government interest expenses. But it's difficult to grasp the right balance; buying too much and injecting excessive liquidity could push inflation higher.
3. Balance sheet adjustment
Assetizing debt could convert part of the illiquid U.S. Treasury bonds into infrastructure revenue rights securities, similar to how China previously handled local debt. There are too many specific methods for this, and I don't quite understand them.
4. Carry the burden together with allies.
For example, the G7 countries could buy more U.S. Treasury bonds, while requiring Wall Street investment banks to underwrite a certain percentage of newly issued U.S. Treasury bonds each quarter to share the pressure.
5. Use resources as collateral while increasing income.
The oil extraction rights in Alaska could be securitized as a repayment guarantee for U.S. Treasury bonds. Even commercializing the strategic oil reserves could earn a significant amount of money each year.
🧐 Risks:
Tax increases and benefit cuts could trigger social discontent. If the 10-year Treasury yield breaks above 5.25%, it could cause panic in the market. If the U.S. dollar index falls below 95, other countries might accelerate the sale of U.S. Treasury bonds and turn to other currencies.
🕹 Conclusion:
The most likely approach is to 'exchange time for space,' relieving debt burdens through the issuance of ultra-long-term Treasury bonds, cutting expenditures, tax reforms, and moderate inflation. At the same time, we wait for the technological revolution brought by AI to enhance productivity, potentially alleviating debt issues further.
So, it is quite possible that interest rates will be lowered before June. Mr. Powell will not stick to his hard line forever, but market changes are so rapid that the first rate cut might still be triggered by some black swan event. This could reflect in risk assets aiming for new highs this year, but whether there will be a deep pit before reaching those highs remains uncertain.
