The bill for America’s superpower status is coming due

On July 31, the United States and Japan collaborated in a foreign exchange market intervention aimed at stabilizing the Japanese yen, which had plummeted to a 40-year low. The US Treasury Department worked with the Federal Reserve Bank of New York to purchase yen using euros from the Exchange Stabilization Fund, while Japan's Ministry of Finance and the Bank of Japan deployed 13.8 trillion yen in funds.

This was the first joint yen purchase between Washington and Tokyo since the 1998 Asian financial crisis. US Treasury Secretary Scott Bessent claimed the intervention was necessary to prevent a domino effect of currency devaluations in Asia, likening the Asian crisis to one triggered by an excessively weak yen. Bessent emphasized that maintaining a stable yen is crucial for the United States and the entire region, as a substantial weakening of the yen could cause other currencies to follow suit.

However, forex experts believe the real motivation behind the intervention was to curb a potential fire sale of US treasuries by Japan. As of May, Japan owned $1.14 trillion in US treasuries, the highest amount held by any foreign entity. Japan needs to sell treasuries to defend the yen, which would raise bond yields and further exacerbate the country's financial situation.

The US purchase of yen via a euro sale and Japan's use of the Federal Reserve's Foreign and International Monetary Authorities Repo Facility highlight the US' primary fear: the breakdown of its domestic bond market, already burdened by public debt equal to 100.2% of GDP. Interest payments on this debt have already surpassed $970 billion, and are projected to exceed $1 trillion this year.

Experts warn that under current treasury yields, yearly interest payments on public debt could soar to $2.5 trillion by 2036, consuming 30% of government revenues. This potential bond sell-off poses a financial crisis akin to a bank run. The weakening status of US treasuries as a safe haven could signal American decline. To address this issue, the US would need to implement severe budget cuts and tax increases, but the current administration continues to increase the deficit through tax cuts and expansive defense spending.

The US has faced similar concerns of national decline in the past, but favorable conditions in the 1990s, including the IT revolution and the fall of the Soviet Union, helped the Clinton administration raise taxes and cut spending, resulting in a budget surplus and maintaining US hegemony. However, today's challenges are more complex, with the debt-to-GDP ratio now exceeding 30%-40%, and a lack of political will to address fiscal issues.

Populism has led to tax cuts, increased spending, and military interventions, all while facing rising competition from China in various spheres. Historian Paul Kennedy warned that empires face decline when they overextend their resources, diverting wealth creation to military purposes. The US' current situation suggests a potential case of imperial overreach, with the consequences of such actions becoming increasingly apparent.