Analysis of Historical U.S. Debt Default Events

The Truth about the U.S. Debt Default

Recently, there have been constant rumors of debt default in the United States. What is the actual situation? Let us delve deeper to understand the truth about the U.S. debt default.

Two Types of U.S. Debt Defaults

The U.S. debt default can be categorized into technical default and substantive default. Technical default arises from the failure to approve the debt ceiling or a budget impasse, which temporarily prevents the U.S. Treasury from repaying its debts. This is essentially due to the political deadlock within Washington and not because the government lacks the ability to repay. It's like a bank account being frozen, only allowing for credit card deferment applications, while there are still funds in the account.

A substantive default is when one truly “cannot pay back the money,” akin to the situation in certain countries. However, it is almost impossible for the United States to encounter this scenario for a simple reason: the dollar is issued by the United States itself, and if a default were to occur, they could simply print more money. Nevertheless, crazy money printing comes at a cost—inflation.

Risk Analysis of U.S. Treasury Bonds

Recently, there have been claims that “U.S. Treasuries are about to reach a maturity peak, posing significant refinancing risks,” and some even believe this is a “trap” set by the government. There are also concerns that after resolving the debt ceiling issue, the massive issuance of U.S. Treasuries could trigger a “liquidity crisis.”

What truly deserves attention is the issuance of U.S. Treasury bonds with maturities over one year. The United States follows the issuance principle of “long bonds as planned, short bonds as needed.” Short-term Treasury bonds can flexibly respond to the surge in deficits, while the actual amount maturing in June may be around $2 trillion, far lower than the rumored $6 trillion. The likelihood of a liquidity crisis occurring is low, primarily due to ample reserves, the ability to adjust U.S. Treasury bond issuance flexibly, and the Federal Reserve acting as a last resort.

The Global Status of the US Dollar Bonds

In fact, US dollar bonds still have the lowest default rates globally. Although the US debt level is approaching historical highs, this reflects economic growth. As long as the debt is denominated in dollars and the market maintains confidence, the US can sustain its self-circulation in various ways.

The reason why the US dollar remains strong lies in America's global leadership in technology and the stability of its political system. Unless a major event occurs that disrupts this stability, the dollar will not easily depreciate.

Changes in U.S. Credit Ratings

The United States has maintained a long-term S&P AAA credit rating, but in 2011 it was downgraded to AA+ due to the debt ceiling issue. Although it is lower than some countries, it is still higher than many others.

Recently, the US dollar index has dropped, mainly due to increased risks of political and economic uncertainty. However, this does not mean that the US government debt will default, as that is an unlikely scenario.

Outlook on US Debt

Although there are fluctuations in the U.S. debt issue, as long as the political system remains stable, it is unlikely that the U.S. will experience a substantial debt default in the foreseeable future. The market still has confidence in U.S. Treasury bonds, and in the long term, the status of U.S. Treasury bonds remains solid.