The bill for America’s superpower status is coming due

On July 31, the United States and Japan collaborated to intervene in the foreign exchange market, aiming to bolster the value of the Japanese yen, which had plummeted to a 40-year low. The US Treasury Department, through the Federal Reserve Bank of New York, purchased yen using euros from the Exchange Stabilization Fund, while Japan's Ministry of Finance and the Bank of Japan deployed approximately 13.8 trillion yen in funds.

This intervention marked the first time such a joint action had taken place since 1998, during the Asian financial crisis.

The justification provided by US Treasury Secretary Scott Bessent was to prevent a domino effect among Asian currencies. In an interview with CNBC, Bessent stated that a stable yen is crucial not only for the US but also for the entire region, as a substantial weakening of the yen could trigger a similar decline in other currencies. He noted that excess volatility in currencies like the Korean won and concerns about the undervaluation of the Chinese RMB further contributed to this perspective.

However, forex experts have suggested that the real motivation behind the US intervention might have been to curb a possible large-scale sale of US treasuries. As of May, Japan held US$1.14 trillion worth of US treasuries, surpassing any other foreign nation. To defend the yen, Japan would need to sell treasuries, which would likely increase bond yields even further.

Instead, Japan utilized the Federal Reserve's Foreign and International Monetary Authorities Repo Facility to acquire dollars, rather than selling its existing treasuries.

The US purchase of yen through a euro sale, combined with Japan's strategic use of the Repo Facility, highlights the US' primary concern: the potential collapse of its domestic bond market. With public debt on par with the country's GDP, standing at US$31.27 trillion, or 100.2% of GDP, the situation is alarming. Excluding the pandemic, the last time public debt exceeded 100% of GDP was in 1946, shortly after World War II.

The Congressional Budget Office predicts that, under current trends, the debt ratio would reach a historical high of 175% of GDP by 2056.

Even more concerning than the magnitude of the debt is the cost of servicing it. In the previous year, the US paid US$970 billion in interest payments, and this figure is projected to surpass US$1 trillion this year. The Committee for a Responsible Federal Budget, a bipartisan think tank based in Washington, estimates that under current treasury yields (around 4.6% for 10-year notes and 5.2% for 30-year notes), yearly interest payments on public debt could reach US$2.5 trillion in 2036.

Consequently, interest payments would consume 30% of government revenues, compared to 19% last year. This fiscal issue has now transformed into a financial concern, as doubts about the government's solvency could trigger a bond sell-off. In past crises, the world's money typically flowed into US treasuries, as they were perceived as the safest asset.

However, since President Donald Trump's "Liberation Day" declaration last April, dollar-denominated assets have been viewed as the epicenter of crises, leading to significant liquidation of treasuries. The weakening of US treasuries' status as a safe haven signals a form of American decline.

To address this dilemma, the US would need to implement painful budget cuts, which would require both reducing spending and increasing taxes. However, the Trump administration has been exacerbating the deficit through massive tax cuts and increased defense spending, including a recent surge in military interventions like the war with Iran.

Trump has also requested a budget increase for defense, from US$961.4 billion this year to US$1.5 trillion next year. This approach has backfired for Trump, who has engaged in self-destructive tariffs, military adventurism, and attacks on the Federal Reserve's independence. This is not the first time the US has grappled with concerns about national decline due to excessive government bond issuance; similar fears were expressed in the 1980s.

However, in the 1990s, favorable conditions such as the IT revolution and the fall of the Soviet Union led to a budget surplus under the Clinton administration, averting competition from Japan and solidifying the US' position as a global hegemon. Today, numerous factors are undermining the US, as the debt-to-GDP ratio has surged to 30%-40%, and politicians lack the resolve to impose fiscal discipline.

Influenced by populism, the US is simultaneously lowering taxes, increasing spending, and waging unnecessary wars, while China, its current rival, competes on economic, military, and ideological fronts. Historian Paul Kennedy, in his 1987 book "Rise and Fall of the Great Powers," argued that an empire's decline accelerates when it overextends itself, diverting excessive resources from wealth creation to military purposes.