Core view:
After the subprime mortgage crisis and covid-19 crisis, the scale of U.S. debt expanded rapidly, but from the perspective of interest repayment and government leverage, the impact of debt expansion on the U.S. Treasury Department is limited. After the two crises, the Federal Reserve indirectly financed the Treasury's debt by issuing more money and purchasing US bonds in the secondary market. At the same time, it reduced the yield of US bonds through expectation guidance and quantitative easing, providing a strong guarantee for the Treasury to issue bonds on a large scale without bearing the pressure of higher interest rates. Looking ahead, under the background that the demand of foreign departments for US bonds is gradually approaching saturation and the growth rate of fiscal expenditure is not decreasing, it is expected that the US Treasury will continue to rely on the Federal Reserve to finance its debt, and there may be no turning back for debt monetization.
The Federal Reserve reduced the debt pressure after fiscal stimulus for the Treasury
After the subprime mortgage crisis in 2008 and covid-19 crisis in 2020, the scale of U.S. government debt expanded significantly, and the net debt issuance reached $3.1 trillion and $6.2 trillion respectively in the two years after the two crises. However, from the perspective of interest repayment pressure and U.S. government leverage, the impact of the two debt expansions on the Treasury is limited, and the key lies in the cooperation between the Treasury and the Federal Reserve. After the two crises, the Federal Reserve purchased US bonds on a large scale in the secondary market to indirectly finance the Treasury's debt. At the same time, it reduced the yield of medium and long-term US bonds through expectation guidance, providing a strong guarantee for the Treasury to issue bonds on a large scale without bearing high interest pressure. According to our calculation, the net debt issuance scale of the United States during the covid-19 crisis was twice that during the subprime mortgage crisis in 2008, but the interest cost increased by only 2% compared with that in 2008.
Fiscal + monetary, dual track and use to deal with the crisis.
During the two crises, the Federal Reserve not only kept the federal funds rate close to zero, but also started a total of four rounds of quantitative easing. However, monetary policy has its own limitations. When the crisis comes, fiscal stimulus may be more effective than monetary policy in hedging the deflationary pressure caused by the deleveraging of the private and corporate sectors and resisting the risk of economic recession.
The Federal Reserve has now become the second largest holder of US bonds. Although the Federal Reserve cannot directly subscribe for treasury bonds from the Ministry of finance, the Federal Reserve can purchase treasury bonds in the secondary market through the channel of primary bond dealers, and transfer the additional currency to the Ministry of finance through primary dealers. The Ministry of finance will use the funds to support the financial expenditure or deposit them into the TGA account after financing the money. In this process, the Fed's assets (the increase of its treasury bonds) and liabilities (the increase of reserves and TGA cash balance) increased at the same time. Therefore, the size of the Fed's balance sheet expanded. In the balance sheet of the Ministry of finance, the asset side (TGA increase) and the liability side (national debt increase) also increase at the same time.
U.S. government debt will continue to expand, and there is no turning back to debt monetization.
From the perspective of the creditor structure of U.S. federal debt, the proportion of U.S. debt held by foreign creditors decreased significantly from 2008 to 2020, while the proportion of U.S. debt held by the Federal Reserve increased significantly, indicating that the demand of foreign departments for U.S. debt is gradually approaching saturation, while the Federal Reserve needs to continue to provide a bottom for the U.S. debt issued by the Treasury. The drastic change in the structure of US debt creditors implies that the power of US debt at both ends of supply and demand is gradually unbalanced. Looking ahead, the market's ability to digest US bonds is limited, but the growth rate of US Treasury expenditure remains unchanged. The US federal government may only continue to rely on the Federal Reserve to finance its US bonds.
Risk tip: the continuous fermentation of the conflict between Russia and Ukraine has impacted the economic expectation; Covid-19 epidemic spread more than expected.
