Recently, the American banking industry could be described as "thunderous," with Silicon Valley Bank suddenly being taken over, effectively declaring bankruptcy. This was followed by the announcements of bankruptcy from Silvergate Capital and Signature Bank, which inevitably brought to mind the scenes from the 2008 financial crisis.

Many people have begun to worry that the successive bankruptcies of banks and the lack of liquidity might trigger systemic risks in the financial industry. Coupled with the various long-standing issues in the U.S. economy, a new round of financial crisis seems imminent.

In addition to the crisis-ridden banking sector, the U.S. is also facing another major challenge: the potential default risk of U.S. Treasury bonds. The current total amount of U.S. debt has exceeded $31 trillion, reaching the statutory debt ceiling. The U.S. GDP created in a year is around $25 trillion, with the debt-to-GDP ratio as high as 124%. There is no hope of repaying the principal; it can only be sustained by borrowing new money to repay old debts.

What's more worrying is that there is still internal debate within the U.S. about whether to raise the debt ceiling. If an agreement is not reached, the U.S. Treasury will not be able to issue new Treasury bonds, and the routine of issuing new bonds to repay old ones will not be sustainable. A U.S. debt default would be a significant event that global investors would have to face.

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This is not an alarmist statement but a warning issued by the U.S. Congressional Budget Office (CBO) in February this year. If the debt ceiling remains unchanged, the U.S. federal government will default on its debt between July and September 2023.

As of January this year, China still held $859.4 billion in U.S. Treasury bonds. If U.S. debt defaults, would it become worthless paper? Should it be cleared?

On this matter, some people are opposed, and some are in favor. Each side has its own reasons. What should be done? Today, let's analyze the objective facts, and you will have your answer after reading.

In essence, U.S. Treasury bonds are the U.S. government borrowing money from the world by "showing its face." The strong comprehensive national power supports the credit foundation of U.S. debt. Theoretically, as long as the United States does not fall, U.S. debt can be issued indefinitely because the debt will not mature all at once, and the principal can be repaid by borrowing new money to repay old debts, as long as the interest is paid on time.

With U.S. debt as the goose that lays golden eggs, every U.S. president has been a master at "borrowing money." The 42nd President Clinton increased the U.S. debt by $1,660.4 billion during his eight-year term. At the end of 2000, when he left office, the U.S. debt balance was as high as $5,662.2 billion.

The 43rd President George W. Bush doubled the U.S. debt in his eight years. When he left office in December 2008, the U.S. debt balance reached $10,699.8 billion. Obama also served for eight years and "borrowed" nearly $10 trillion, with the U.S. debt balance soaring to $19,976.83 billion. Trump was even more aggressive, only serving for four years, and the U.S. debt balance increased by $9.64 trillion. When he left office at the end of December 2020, the U.S. debt scale reached $29,617.22 billion.The new U.S. administration has encountered an interest rate hike cycle and is entangled in the debt ceiling issue. The growth of U.S. debt is not significant. As of March 17th, the latest U.S. debt balance stands at $31.62 trillion. Although the growth rate has slowed down, the absolute value is increasing. From $5.6 trillion at the beginning of the 21st century to the current $31 trillion, it has nearly multiplied by six.

As the U.S. debt scale grows larger, the interest cost also gradually increases. In the low-interest-rate environment of the past few years, the United States paid about $300 billion in U.S. debt interest annually. Since the interest rate hike last year, the interest expenditure on newly issued U.S. debt has increased rapidly.

According to data from the U.S. Congressional Budget Office (CBO), in the fiscal year of 2022, the interest expenditure on U.S. national debt reached $475 billion, and in the fiscal year of 2023, it will reach $640 billion. By the fiscal year of 2033, the interest expenditure on U.S. national debt will soar to $1.4 trillion.

The U.S. debt balance is snowballing, and the interest expenditure is continuously increasing. Coupled with the constraints of the debt ceiling, problems are bound to arise sooner or later. From this perspective, taking precautions and clearing U.S. debt in a timely manner is also an option.

Before discussing clearing U.S. debt, we need to understand why we bought U.S. debt in the first place. The main reasons are as follows:

First, U.S. Treasury bonds have achieved a balance of safety, liquidity, and returns, and are an important component of the official foreign exchange reserve assets of central banks around the world.

China is the world's largest goods trading country, with a long-term trade surplus. At the same time, we are also the world's best investment destination, with a large influx of foreign capital into China every year. Whether it is foreign trade surplus or foreign direct investment, dollars or other currencies cannot be used directly and must be exchanged into RMB at banks before they can circulate domestically. Over time, the central bank holds more and more dollars.

With such a large sum of money in hand without interest, Western countries have long-term low interest rates or 0% interest rates, and even the European Central Bank has negative interest rates. It is even less cost-effective to keep it in overseas bank accounts, and it is even more impossible to invest in stocks. Foreign exchange reserves would rather have low returns but must not lose a large amount of principal.

Because these dollar foreign exchanges are concentrated in the hands of the central bank after enterprises or foreign merchants exchange currency. Enterprises need to exchange the held RMB back into dollars for importing raw materials, foreign merchants need to remit dividends, and capital needs to withdraw. If the principal of foreign exchange reserves is lost in large amounts, liquidity is insufficient, and exchange demands cannot be guaranteed, it will affect the country's import and export business and the confidence of foreign capital.

In other words, foreign exchange reserves must ensure sufficient safety and also set aside a considerable amount of liquid money that can be cashed at any time to ensure sufficient foreign exchange liquidity to meet rigid redemption demands. At the same time, it is also necessary to try to preserve and increase the value of foreign exchange reserve assets. It cannot be deposited in banks to earn interest, nor can it invest in high-risk assets, and it must be cashable at any time. After comprehensively weighing the pros and cons, purchasing U.S. Treasury bonds is the best choice for a considerable period of time.Secondly, foreign exchange reserve assets can fend off external risks, compensate for the deficit in the balance of payments, and stabilize the exchange rate of the local currency.

It is challenging for a country to achieve a balance in import and export business, that is, imports = exports. At different times, the import and export amounts are always mismatched, either exports > imports, resulting in a trade surplus, or imports > exports, leading to a trade deficit.

An important role of foreign exchange reserves is to use the reserve assets to make up the shortfall when there is a deficit. For example, if a company earns $100 from exports and needs $110 to import raw materials, the $10 difference would need to be covered by foreign exchange reserves.

On the other hand, the exchange rate of a country's currency is not constant. If there are sudden fluctuations or a long-term one-sided trend, it is necessary to use foreign exchange reserves to plan the purchase or sale of the corresponding foreign currency in the foreign exchange market to stabilize the local currency exchange rate.

In the second half of 2022, the Japanese yen continued to depreciate, and the exchange rate of the US dollar against the yen depreciated significantly. The Bank of Japan had to sell a large amount of US dollars and buy yen in the foreign exchange market to raise the yen exchange rate. As a result, in September 2022, it sold US debt worth $79.6 billion to raise funds.

To fully utilize these roles of foreign exchange reserves, it is necessary to ensure that they are available when needed. It is better to be prepared and not use them than to need them and not have them. The safety and high liquidity advantages of US Treasury bonds are very obvious, and central banks around the world generally include them in their official reserve assets.

At this stage, it is unrealistic to completely clear US debt, which is too emotional. From the perspective of national interests, holding a certain amount of US debt is more beneficial than harmful.

The scale of US Treasury bonds is continuously increasing, and the risks are also accumulating. The United States can only borrow new money to repay the old, which is an almost unsolvable problem. For us, eggs cannot be put in one basket, and diversification of foreign exchange reserve assets is imperative. Currently, the balance of US Treasury bonds held by China accounts for less than 30% of foreign exchange reserves, and other currency assets and gold reserves are increasing, which is a gratifying fact.

At the same time, the internationalization of the renminbi is progressing steadily and is accepted and recognized by more and more countries. The Russian National Wealth Fund has completely cleared US dollars and euros, leaving only the renminbi as the only foreign currency. In the Middle East, some countries have also included the renminbi in their official reserve assets.

As the degree of renminbi internationalization increases and more renminbi is used in international trade, there is naturally no need to hold so many US bonds. We need to take one bite at a time and one step at a time. I believe that one day, China can completely clear US debt, but it is definitely not now.