European leaders are considering dumping $2.34 trillion in US debt if Trump abandons Ukraine, potentially triggering an economic crisis worse than 2008
European leaders are considering dumping $2.34 trillion in US debt if Trump abandons Ukraine, potentially triggering an economic crisis worse than 2008
What’s does it mean to dump debt?
I’m no economist and will probably get this wrong, but since there is nobody else here… least I can do is give you enough an answer that someone more knowledgeable will come and correct me.
Basically, governments can print magic slips of paper called “bonds” that people will want to buy for two primary reasons: (1) they get interest when they hold the bonds (interest paid by taxes), and (2) the bond is considered a safe way to store value (like how a house is considered a safe way to store value). The government, in return for selling those magic pieces of paper, gets the money used to buy the bonds. It’s the Treasury Bond market.
Now here’s two important details about the bond market: (1) Bonds have an inverse relationship with cost and interest rates. If stockpiles of bonds get sold, that increases the supply of bonds which causes price to fall — adversely causing interest rates to hike up. (2) Because U.S. Treasury bonds are considered risk-free, all other interest rates in the economy (mortgages, car loans, corporate debt) are built on top of the Treasury yield (Example: If a 10-year Treasury yields 5%, a bank might offer a 10-year mortgage at 5-6%). Basically, Treasury rates set the floor for almost all borrowing costs.
So if a foreign state sells massive quantities of bonds, interest rates everywhere can shoot up. That can make all of our existing debt too difficult to pay back. We’d be stuck with three options if it gets bad enough: (1) default on the debt, (2) debase our currency by printing enough money to push the problem down the road, or (3) balance the governments budget.
From what I understand, we’ve already pushed the limits of option 2 during the Housing Crisis and COVID. Printing more money is talked about as though it’s impossible without causing more harm than good. Honestly, I don’t know what happens if the bond market cracks at this point… a depression comparable to TGD?
Thank you.
The neoliberal claim that the amount of money printed directly influenced inflation has been tested and couldn’t be proven so far.
Hyperinflation is either caused by too much demand or too little supply of goods, or by greedy fucking billionaires price fixing.
They still keep making that claim and neoliberal governments (pretty much all of them) still act on it because it makes rich people richer. Nations sell their public infrastructure or make other bad deals to beg private actors for money, those earn interest and dividends.
As long as the USD is the de facto world currency it also seems highly unlikely that any amount of money printing would hit it’s value too hard. There’s always demand for dollars. On the other hand, Trump is working hard on incentivizing the world to use different currencies.
That they would sell or let their holding of US bonds expire and take the principal.
So like calling in the loan?
You could look at it that way. Broad strokes yes. The thing is it is probably a bluff.
The problem is the US dollar is the world reserve currency and the Euro Dollar market is massive. So even if a country doesn’t transact directly with the US it still is using dollars for transactions. The US is also the only world super power with a military to back that up.
When Russia started up in Ukraine again the Biden administration booted them from the settlement system and froze their funds in western institutions. Seeing that happen China and Russia are heading up a new BRICS settlement system. That is a direct threat to US interests in remaining the reserve currency.
The US response to this is to go after some of those countries joining BRICS with revolutions and stuff. And at home to pass the Genius Act. An attempt to keep US Treasuries relevant by requiring crypto stable coins to hold them as collateral.
What I think is happening is the US is going after all the other transactions for the people in countries with less stable currencies. Brent Johnson the Dollar Milkshake theory guy has his Orlando Investor conference talk on this theory up for free on youtube if you are interested.
TLDR: Some nations aren’t happy with the US and how it is acting and are threatening to de-dollarize. Except the US Navy is why much of the trade happens.
I don’t think exactly. As I understand: let’s say Italy is holding US debt. This debt has a certain value as long as the US economy is good because then there is a chance of repayment. So as long as Italy holds US debt, it’s interested in having trade with the US or generally being invested in the US economy to keep up the value of their debt.
If they let go of the debt they would have less interest in keeping the US economy up. They would pr stop encouraging their Italian companies to buy American machines/goods/services.
Something like that.
But how do they “let go” of US debt?