Fed's 25 Basis Point Hike Fails to Harvest; $31T at Risk

Early this morning, the Federal Reserve made an unexpected decision, followed by an unexpected speech by Powell. It now appears that the wave of bank bankruptcies in the United States will continue, but the bigger issue is that the United States' debt problem, which has already reached $31.4 trillion, is likely to explode into an even bigger scandal.

01, Increasing Bankruptcies

As early as the first wave of bank bankruptcies in the United States in March, people had already begun to predict that the Federal Reserve would stop raising interest rates. However, unexpectedly, the Federal Reserve still raised rates by 25 basis points at that time. Subsequently, investors believed that the Federal Reserve would decide not to raise interest rates at its May meeting, but once again, an unexpected event occurred, and the Federal Reserve raised interest rates by another 25 basis points. Powell further pointed out at the press conference that there has been no discussion about stopping interest rate hikes, which is another unexpected event. A couple of days ago, the First Republic Bank in the United States was announced to be taken over. It is believed that the continuous interest rate hikes in the United States will affect more banks. Now, the stock price of the West Pacific United Bank has fallen by 45%, and it seems that the next bankrupt bank will appear soon.

02, U.S. Treasury Default Risk

In addition, the potential for bankruptcy is not only commercial banks but also possibly U.S. Treasury bonds. Treasury Secretary Yellen recently sent a letter to Congress, urging an immediate increase in the debt ceiling, otherwise, U.S. Treasury bonds may default as early as next month.Ever since the U.S. government's $31.4 trillion national debt reached its limit in January, Yellen has issued such warnings on more than one occasion, causing unease in the financial markets.

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Currently, the risk of U.S. debt default is on the rise, with a significant outflow of deposits from American banks and a continuous decline in global trust in the United States. Consequently, other countries may reduce their purchases of U.S. debt and decrease the use of the U.S. dollar.

Now, the U.S. Congress aims to alleviate domestic cash flow by raising the debt ceiling and reducing the fiscal spending of the U.S. federal government.

However, President Biden has repeatedly stated that the debt ceiling must be raised without any conditions, or else he will veto the relevant proposals.

The Democratic and Republican parties in the U.S. are already in internal dispute over how to raise the debt ceiling, making it hard to imagine how the country will address various other crises.

03, No One Wants to Buy

Who will be willing to purchase U.S. Treasury bonds in the future?

Europe is clearly not a potential buyer.

After the bankruptcy of American banks, it quickly affected Credit Suisse in Europe, leading to the absorption and merger of this large bank. At the same time, it also resulted in a contraction of Europe's credit scale and a decline in Europe's economic development.

Europe's financial system has not only become unstable as a result, but the interest rate hikes by the central banks of Europe and America have also intensified the impact on the financial markets.The oil-producing countries in the Middle East are clearly not potential buyers either.

In the past, when exporting oil to the Middle East, due to the use of the US dollar for settlement, a large amount of US dollars were earned, which were eventually used to purchase US Treasury bonds. But now the situation has changed dramatically, and many oil exports are settled in other currencies, so Middle Eastern countries have no incentive to buy US Treasury bonds.

04, not paying the bill

The approach taken by China is to massively sell US Treasury bonds, completely ignoring the request of US Treasury Secretary Yellen.

After all, no matter whether the United States can raise the debt ceiling or not, this $31 trillion in US Treasury bonds is likely to default sooner or later, which is a huge mine for the global financial market.

Therefore, we will continue to promote the development of a multipolar global currency, and use the renminbi for settlement as much as possible in trade with other countries to avoid dependence on the US dollar.