A primer on US debt default purgatory

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Republicans and Democrats are again playing a game of chicken over the US debt ceiling – with the nation’s financial stability at stake.

Treasury Secretary Janet Yellen recently said that June 1, 2023, is a “hard deadline” for raising the debt limit, currently set at US$31.38 trillion, to avoid an unprecedented default. The government hit the ceiling back in January and has been using “extraordinary measures” since then to keep paying its bills.

Last-minute negotiations between the White House and Republicans have been mostly fruitless as conservatives in the House push for big spending cuts and policy changes, while President Joe Biden has insisted on lifting the ceiling with no strings attached. They are expected to continue to meet in the coming days.

Economist Steven Pressman explains what the debt ceiling is and why we have it – and why it may be time to abolish it.

1. What is the debt ceiling?

Like the rest of us, governments must borrow when they spend more money than they receive. They do so by issuing bonds, which are IOUs that promise to repay the money in the future and make regular interest payments. Government debt is the total sum of all this borrowed money.

The debt ceiling, which Congress established a century ago, is the maximum amount the government can borrow. It’s a limit on the national debt.

2. What’s the national debt?

The US government debt of $31.38 trillion is about 22% more than the value of all goods and services that will be produced in the US economy this year.

Around one-quarter of this money the government actually owes itself. The Social Security Administration has accumulated a surplus and invests the extra money, currently $2.8 trillion, in government bonds. And the Federal Reserve holds $5.5 trillion in US Treasurys.

The rest is public debt. As of October 2022, foreign countries, companies and individuals owned $7.2 trillion of US government debt. Japan and China are the largest holders, with around $1 trillion each. The rest is owed to US citizens and businesses, as well as state and local governments.

3. Why is there a borrowing limit?

Before 1917, Congress would authorize the government to borrow a fixed sum of money for a specified term. When loans were repaid, the government could not borrow again without asking Congress for approval.

The Second Liberty Bond Act of 1917, which created the debt ceiling, changed this. It allowed a continual rollover of debt without congressional approval.

Congress enacted this measure to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to $11.5 billion and required legislation for any increase.

The debt ceiling has been increased dozens of times since then and suspended on several occasions. The last change occurred in December 2021, when it was raised to $31.38 trillion.

4. What happens when the US hits the ceiling?

Whenever the US nears its debt limit, the Treasury secretary can use “extraordinary measures” to conserve cash, which she indicated began on January 19. One such measure is temporarily not funding retirement programs for government employees. The expectation will be that once the ceiling is raised, the government would make up the difference. But this will buy only a small amount of time.

If the debt ceiling isn’t raised before the Treasury Department exhausts its options, decisions will have to be made about who gets paid with daily tax revenues. Further borrowing will not be possible. Government employees or contractors may not be paid in full. Loans to small businesses or college students may stop.

When the government can’t pay all its bills, it is technically in default. Policymakers, economists and Wall Street are concerned about a calamitous financial and economic crisis. Many fear that a government default would have dire economic consequences – soaring interest rates, financial markets in panic and maybe an economic depression.

Under normal circumstances, once markets start panicking, Congress and the president usually act. This is what happened in 2013 when Republicans sought to use the debt ceiling to defund the Affordable Care Act.

But we no longer live in normal political times. The major political parties are more polarized than ever, and the concessions McCarthy gave right-wing Republicans may make it impossible to get a deal on the debt ceiling.

5. Is there a better way?

One possible solution is a legal loophole allowing the US Treasury to mint platinum coins of any denomination. If the US Treasury were to mint a $1 trillion coin and deposit it into its bank account at the Federal Reserve, the money could be used to pay for government programs or repay government bondholders.

This could even be justified by appealing to Section 4 of the 14th Amendment to the US Constitution: “The validity of the public debt of the United States … shall not be questioned.”

Few countries even have a debt ceiling. Other governments operate effectively without it. America could too. A debt ceiling is dysfunctional and periodically puts the US economy in jeopardy because of political grandstanding.

The best solution would be to scrap the debt ceiling altogether. Congress already approved the spending and the tax laws that require more debt. Why should it also have to approve the additional borrowing?

It should be remembered that the original debt ceiling was put in place because Congress couldn’t meet quickly and approve needed spending to fight a war. In 1917 cross-country travel was by rail, requiring days to get to Washington. This made some sense then. Today, when Congress can vote online from home, this is no longer the case.

Steven Pressman is Part-Time Professor of Economics, The New School

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Indian diplomacy in overstretch mode

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Indian Foreign Secretary Foreign Secretary Vinay Kwatra’s special briefing on Prime Minister Narendra Modi’s Asia-Pacific tour (May 19-24) dovetailed skillfully into three summit meetings, and brings to mind an institution of the Middle Ages known as the “wandering minstrels.” 

Wealthy people used to employ minstrels to entertain them in their homes. These wandering minstrels told stories, recited poems, sang ballads and played musical instruments. Employing simple rhymes, their ballads told stories that were of interest and at times even dealt with the problems of the poor.

Modi’s first stop was Hiroshima, Japan, where he was a special invitee to a  gathering of the club of rich nations, the Group of Seven, which was born as a result of mounting economic problems, in particular the oil shock and the collapse of the Bretton Woods in the mid-1970s.

According to Kwatra, the G7’s outreach with India was to be “structured around three formal sessions,” relating to food,  health, development, gender equality, climate, energy, environment and a “peaceful, stable and prosperous world.”

Japan, as holder of the G7 presidency, also hosted Australia, Brazil, Comoros, the Cook Islands, Indonesia, the Republic of Korea and Vietnam as “special invitees.” It was a motley crowd that made little sense as movers and shakers of the world order. 

But the Western media were awash with reports that the West’s preoccupations with China and Russia would be the leitmotif of the G7 Summit. Therefore, the last-minute decision by Ukrainian President Volodymyr Zelensky to attend the summit in person electrified the air in Hiroshima, giving the goings-on there on the weekend the look of a foreplay leading to the making of an endgame in the Ukraine war, if and when that happens.

In such a scenario, of course, there are vital roles that could be assigned by the US to Brazil and India – both BRICS members – and to South Korea, which has actually lived through a “frozen conflict.”

But all that is in the realms of speculations for the present, as it will be a far-fetched assumption that a frozen conflict “somewhere in between an active war and a chilled standoff” will suit Russia, although that “could be a politically palatable long-term result for the United States and other countries backing Ukraine” gingerly to exit the war in Eurasia – to borrow from an important article in Politico on May 18 titled “Ukraine could join ranks of ‘frozen’ conflicts, US officials say,” even as Biden was emplaning for Hiroshima.

Be that as it may, India’s enthusiasm was on two counts – first, the opportunity for Modi to have extended interactions with US President Joe Biden in different locales spread over an entire week, at Hiroshima, Papua New Guinea and Sydney. Second, the Quadrilateral Security Dialogue was to hold a summit in Sydney, Australia, where India saw the  opportunity to showcase itself as a “counterweight” to China. 

Australian Prime Minister Anthony Albanese, US President Joe Biden, Japanese Prime Minister Fumio Kishida and Indian Prime Minister Narendra Modi attend an event during the summit of Quad leaders in Tokyo, Japan, on May 24, 2022. Photo: Pool

However, fate intervened. The slow-motion implosion of the US economy bothers Biden, and he cut short his Asia tour to a weekend affair so as to hurry back to Washington by Sunday and resume work in the Oval Office to shore up the “steady progress” so far achieved in the grueling debt ceiling talks between the administration and the lawmakers. 

However, scuppering the planned Quad Summit in Sydney next week would convey a wrong signal, too. Therefore, diplomats found a way to squeeze in a substitute Quad photo-op in Hiroshima itself.

After all, as Foreign Secretary Kwatra pointed out, the Quad is a movable feast – “Look, the structure and nature of [the] Quad is such that … [although] the Quad Leaders’ Meeting not taking placing in Sydney and now taking place in Hiroshima is a change in venue, there has not been any change in the specific aspects of cooperation in [the] Quad.” 

But Chinese commentators are already mocking that the cancellation of the Sydney summit is “an omen of the Quad’s fate.” And The Guardian newspaper wrote that the cancellation of the Quad Summit in Sydney would spawn narratives that “the US is racked by increasingly severe domestic upheaval and is an unreliable partner, quick to leave allies high and dry.”

The Guardian lamented that the US should worry about its crumbling credibility. Besides, the cancellation of the event in Sydney is a blow to the Australian hosts, in particular. It seems Australian officials had spent months extensively planning the huge logistical and security operation of a Biden visit to Sydney, and last October’s budget actually set aside A$23 million (US$15.25 million) for the costs of hosting the Quad summit. 

The bottom line is: Aren’t these one too many summits? To what purpose, really? To contain China? The G7 itself has become a relic of the past. In fact, what we are witnessing could be the last rites of the old order, as Donald Trump’s theater looms across the Pacific. Also, putting on a show of common endeavor at the G7 is becoming increasingly difficult. There was an end-of-epoch feel to the G7 Summit this year.

Again, take the third meeting of the Forum for India-Pacific Islands Cooperation (FIPIC Summit), which Modi is co-chairing on Monday in Papua New Guinea. Modi launched this forum during his “historic visit” to Fiji in November 2014 when he hosted the first FIPIC Summit. The second FIPIC Summit followed within 10 months in Jaipur, India, in August 2015. Now, almost a decade later, FIPIC is coming back to life after a deep slumber. 

Yet statistics show that India’s trade with all those 14 PIC countries combined – the Cook Islands, Fiji, the Republic of Kiribati, the Republic of Marshall Islands, the Federated States of Micronesia, Niue, the Republic of Nauru, the Republic of Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu – is hovering around US$250 million.

Simply put, while Chinese diplomacy is proactive in the strategically important Western Pacific, the US seems to be encouraging India to mark the lamp-posts there. But from an Indian perspective, this is classic imperial overstretch, and is highly avoidable. This is what Pakistan used to do, copying Indian diplomacy anywhere and everywhere to “catch up” – until it got exhausted and gave up. 

Biden’s original intention was to hop over to Papua New Guinea with a specific agenda – the signing of a maritime security pact and a defense pact with Papua New Guinea that would give American troops access to the Pacific nation’s ports and airports.

Biden’s trip to the Pacific Islands was expected to be a power play in Washington’s face-off with China. For Biden personally, it would also have been a sentimental journey, as his uncle died in Papua New Guinea in the Second World War.

Papua New Guinea’s Lombrum Naval Base is of strategic interest to the US. Image: Facebook

But India carries no remains of the day in the Western Pacific. Isn’t its hands full as it is, with the complex issues of Indian Ocean maritime security, which it is barely able to cope with?

Look at Biden. He coolly decided that with a challenging re-election bid ahead in 2024, the domestic debt ceiling crisis talks in DC ought to be his top priority, and instructed Secretary of State Antony Blinken to stand in for him at the summit with Pacific leaders in Port Moresby on Monday.

Indian diplomacy has something to learn here about the art of prioritizing objectives instead of indulging in shadow boxing and exhausting itself.  

This article was produced in partnership by Indian Punchline and Globetrotter, which provided it to Asia Times.

M.K. Bhadrakumar is a former Indian diplomat. Follow him on Twitter @BhadraPunchline.

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10m foreign tourists since January: govt

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Number of flights from China rising

Thailand has welcomed almost 10 million foreign tourists since January, generating about 391 billion baht in revenue. The government expects the number of Chinese tourists to reach seven million this year.

Traisulee Taisaranakul, deputy government spokeswoman, said yesterday that 9.47 million foreign tourists visited Thailand from January to May 15, mainly from East Asia, South Asia and Southeast Asia.

The government has ordered affiliated agencies to enhance support for incoming tourists, particularly Chinese visitors, to boost tourism growth.

According to the Tourism Authority of Thailand (TAT), Thailand expects to see over 5.3 million Chinese tourists visiting the country. The figure might even reach seven million if supported by other tourism incentives, Ms Traisulee added.

Aeronautical Radio of Thailand (Aerothai) also said there were 12,805 flights from China to Thailand during October 2022 to April, 2023, an increase of 98% compared to the same period the former year.

Chinese tourist numbers rose after China’s announcement on Feb 6 that it would allow international travel via travel agencies.

Aerothai anticipates an increase in the number of flights from China until September this year. It estimates 5,330 flights in May, 6,090 flights in June, 7,150 flights in July, 7,460 flights in August and 7,340 flights in September.

The total estimated number of Chinese flights coming to Thailand during the 2023 fiscal year, from October last year to September this year, is 46,175, said Ms Traisulee.

Meanwhile, the Economics Tourism and Sports Division of the Ministry of Tourism and Sports said there were 415,309 foreign tourists visiting Thailand during May 8-14, or almost 59,329 people per day.

Most are from Southeast Asia, East Asia and South Asia. The top-five international tourists arriving in Thailand by nationality are Malaysians, Chinese, Indians, Lao and South Koreans, making up to 47.5% of all international tourists.

The division said that even though Thailand is entering its low season and the number of tourists is expected to fall gradually, there are many incentives to attract foreign tourists.

Nonetheless, Thailand’s tourism also is affected by external factors including the world economy, which is facing negative pressure from the US debt ceiling talks, high inflation and the Russian-Ukrainian War, said the division.

Marisa Sukosol Nunbhakdi, president of the Thai Hotels Association (THA), said Thailand’s tourism will slow down in the latter half of the year.

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Teachers to get interest rate debt relief from co-ops

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More than half of the teachers’ cooperatives nationwide have reduced the interest on debts owed by teachers who are facing increasing financial difficulties, according to the Cooperative Promotion Department (CPD).

About 900,000 teachers collectively owe at least 1.4 trillion baht. Of this amount, 890 billion baht, or 64% of the loans, is owed to the teachers’ cooperatives, followed by 349 trillion baht to the Government Savings Bank.

The cooperatives, which are overseen by the CPD, have been trying to alleviate the teachers’ debt problems, said Wisit Srisuwn, the CPD director-general.

The department has secured financial support and know-how to sustain the cooperatives, which form an important financial lifeline for many member teachers, Mr Wisit said.

The CPD has signed a memorandum of understanding with the Education Ministry and 12 financial institutions to formulate a comprehensive plan to tackle teachers’ debt.

The plan involves revising the interest charged to teachers and bringing the rate down to around that offered by commercial banks. At the same time, the Education Ministry will advise cooperatives on how to streamline their operations.

Mr Wisit said so far, 70 of the 108 teachers’ cooperatives around the country had joined the interest reduction programme and managed to cut the rates by between 0.05% and 1%.

Of the 70 cooperatives, 11 were able to bring their interest rates below 5%, immediately benefiting at least 460,000 teachers whose debts stand at one million baht on average.

Mr Wisit said for every 1% of interest lowered, each teacher would see their debt go down by up to 10,000 baht per annum. He added that the department had issued cooperatives a guideline for assisting the teachers in controlling their debts.

He also dismissed calls by some members to be allowed to sell their shares in the cooperatives and take out their savings in them while still being able to continue borrowing from them. He said it was not legally possible to do so as the cooperatives were designed to encourage the teachers to have savings.

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G7 summit: Why there are eight more seats at the table this year

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US President Joe Biden (L) is greeted by Japan's Prime Minister Fumio Kishida before their bilateral meeting in Hiroshima on May 18, 2023, ahead of the G7 Leaders' Summit.Getty Images
By Laura Bicker
in Hiroshima

If the G7 were a dinner party, the host would be rummaging in the garage for the extendable table, hunting through boxes for extra placemats and cutlery.

This year’s host, Japan’s Prime Minister Fumio Kishida, has invited eight more guests to the summit, which starts on Friday in Hiroshima.

It is certainly a sign of the thorny agenda that ranges from the war in Ukraine to how much food reaches our own dinner plates. And it is also evidence of a rapidly changing international order, with much of the conversation focusing on two countries that are not on the guest list: Russia and China.

The annual gathering includes the world’s seven wealthiest democracies – Japan, the United States, the UK, France, Germany, Canada and Italy. The European Union, although not an official G7 member, also dispatches representatives. More recently, hosts have invited additional countries at their discretion.

But the economic might of the G7 is waning – in 1990, the group accounted for just over half of the world’s GDP, according to the International Monetary Fund. Now it’s just under 30%. It needs influential new friends.

So Mr Kishida, who is seeking a more global rather than Western coalition, has extended the table to accommodate Australia, India, Brazil, South Korea, Vietnam, Indonesia, Comoros (representing the African Union) and the Cook Islands (representing the Pacific Islands Forum).

The Japanese PM has made 16 overseas trips in the last 18 months, including India, Africa and South-East Asia, to prove to these regions that there is an alternative to Chinese and Russian money and power.

And his guest list for Hiroshima reflects these attempts to woo what many call the “Global South” – a term used for developing countries in Asia, Africa and Latin America, all of whom have complex political and economic ties to both Russia and China.

A not-so-united front

One of Mr Kishida’s clearest aims – to show a “united front” on Russia’s invasion of Ukraine – will also be one his biggest hurdles.

The G7 is reportedly trying to enforce more sanctions aimed at the energy and exports aiding Moscow’s war effort.

Russian President Vladimir Putin and China's President Xi Jinping hold glasses during a reception following their talks at the Kremlin in Moscow on March 21, 2023.

Getty Images

But many of the additional guests will not like this move. India, for instance, has refused to adhere to Western sanctions on Russian imports.

New Delhi has also not explicitly condemned Russia’s invasion of Ukraine. Their long-standing relationship aside, India is also reliant on energy imports and has defended its oil purchases, saying it cannot afford higher prices.

And it is far from alone. Emerging economies have been hit the hardest by rising costs, partly driven up by the war in Ukraine.

Now they fear that more sanctions could compel Moscow to terminate a Black Sea grain deal that enables vital exports from Ukraine. This could exacerbate food shortages and further drive up prices.

For others, this is not just about the personal cost of sanctions.

“Vietnam has a historically close relationship with Russia, which supplies at least 60% of their arms and 11% of their fertiliser,” says Nguyen Khac Giang, a visiting fellow at the Institute of South East Asian Studies in Singapore.

“Indonesia, although not heavily dependent on Russia, is a significant importer of Russian weapons and maintains good relations with Moscow.

“For these reasons, I don’t believe that Hanoi and Jakarta will explicitly object to, or support, further sanctions on Russia. Doing so would pose significant economic and political risks, while offering little benefit to them.”

What Mr Kishida must hope is that his hometown of Hiroshima, where the atomic bomb killed more than 100,000 people, will concentrate minds on the nuclear threat that Russia poses.

Visits around the city will be a constant reminder of the devastation the weapons can inflict, as well as supporting the message that invitees have a responsibility to ensure that such a weapon is never used again.

Pressure will also come from Ukrainian President Volodomyr Zelensky who will be there virtually to make an impassioned plea for his people who have already paid a hefty price.

Most graves of people who died in the Kyiv region as a result of the full-scale Russian invasion of Ukraine are mostly unmarked near the city of Brovary, Ukraine, on May 17, 2023

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That, however, might not be enough to resolve divisions on how far sanctions should go. And there is also the growing frustration among countries outside the G7 that their voices have all too often been ignored by the West. But analysts believe listening and treating these countries as partners is at least a start.

“It provides an opportunity to communicate their concerns with G7 leaders on a vast array of issues, from the war in Ukraine and the slowdown of the global economy, to security risks in East Asia, particularly regarding the South China Sea dispute and Taiwan,” says Nguyen Khac Giang of Vietnam and Indonesia’s involvement.

Countering China

Taiwan – and the tensions in the seas around it – has certainly become one of the biggest crises in the last year.

And as the leader of the only Asian G7 member, Mr Kishida sees the summit as a chance to respond to China’s increasing show of military force around the self-ruled island, which it claims. Tokyo’s message to the West is straightforward – your fight in Ukraine is also our fight, but that must work both ways.

But China, which is effectively sewn into global supply chains, is perhaps a trickier challenge than even Russia.

brigade of the army under the Eastern Theater Command and a department of the Navy carry out a multi-subject combat training in a sea area in Zhangzhou, Fujian province, China, Aug 27, 2022

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On a recent trip to Beijing, France’s President Emmanuel Macron warned that Europe should not get “caught up in crises that are not ours”. His words set off a minor row in the West, but they also renewed a lingering fear of abandonment across East Asia.

Many will remember the words of Republican Senator Lindsay Graham who, at the height of tensions with North Korea, warned: “If thousands die, they’re going to die over there.” Then came President Donald Trump’s threat to reduce US troops in South Korea.

China’s voice, analysts say, is heard clearly because, unlike Western democracies, its position does not change after every election.

Of course, the US, in the past year, has not wavered in its support for Ukraine, or in its commitment to Taiwan. And it has put on its show in the Pacific, alongside allies Japan, South Korea, the Philippines and Australia.

Presentational grey line

Read more of our coverage on US-China tensions

Presentational grey line

But the G7 isn’t just taking aim at China’s military ambitions. They are also concerned about what they call “economic coercion” by Beijing – retaliation for any actions that are seen as critical of China, such as cutting Australian imports in 2019, or targeting a South Korean business in 2017.

It’s unclear what form G7 counter-measures will take, or if it can even agree with its EU partners on how to act together. After all, Japan and the EU both count China as a top trading partner.

But the harder part will be persuading other countries to do the same, because much of the Global South is even more economically tied to Beijing.

China’s trade with Latin America is thriving, for instance. Beijing now accounts for 8.5% of the region’s GDP, while Brazil is among the countries that has a trade surplus with China. But in Africa, several nations, including Ghana and Zambia, are heavily indebted to China and struggling to repay loans.

Beijing has made its opinion of any G7-led measures clear: “China itself is a victim of US economic coercion and we have always been firmly opposed to economic coercion by other countries,” Chinese Foreign Ministry spokesperson Wang Wenbin said last week.

A new battleground

There is one region where the battle for influence is still unfolding – the Pacific Islands. It explains why the tiny nation of the Cook Islands, which represents Pacific Island countries, is on the guest list.

Hugely vulnerable to climate change, these island nations are leveraging their strategic importance with both the US and China.

Resident Lavenia McGoon (R) with a family member standing past a makeshift seawall of old rubber car tyres to prevent erosion, outside her beachfront house at a village in the coastal town of Togoru, some 35 kilometres from Fijis capital city Suva.

Getty Images

Last year, Beijing signed a security pact with the Solomon Islands fuelling concerns that it was going to build a military base in the region. The US reacted swiftly, announcing a deal, including $810m in financial support, with 14 nations.

Now Mr Kishida’s coalition-building efforts will also depend on how the G7 agrees to address climate change and energy security, not least because that could cut countries’ reliance on Russian oil and gas, or Chinese aid.

But there might be a chink in the armour already. After the summit, President Joe Biden was headed to Papa New Guinea, becoming the first sitting US president to visit the Pacific Islands.

He is now cutting his trip short because of a crisis brewing back home over the US debt ceiling. That is a setback, according to Richard Maud, a senior fellow at the Asia Society Policy Institute and former Australian intelligence chief.

“The mantra in the region is all about turning up,” he said at a recent panel discussion. “Turning up is half the battle. China turns up all the time, and so the optics aren’t great.”

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US default, China decoupling hang heavy over Hiroshima

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TOKYO — Japan’s decision to hold this weekend’s Group of Seven (G-7) summit in Hiroshima is appearing more and more “on the nose” with each passing day.

Worries that Russia might use nuclear weapons on Ukraine were part of Japanese Prime Minister Fumio Kishida’s calculus in choosing the city that was the first military target of such armaments in human history. Since that call, though, two economic nuclear options have emerged to fuel a bull market in Hiroshima symbolism.

One is the default drama that risks restoring the US to developing nation status. Republicans toying with financial Armageddon have US President Joe Biden truncating his Asia trip, scrapping stops in Australia and Papua New Guinea.

The other is how to play the China “decoupling” dynamic threatening to blow up world markets — and the Global South nations that host Kishida is inviting to the G-7. Along with Canada, France, Germany, Italy, the UK and the US, Japan has invited leaders from India, Brazil, South Korea, Vietnam, Australia and African Union and Pacific Islands nations.

Yet try as they may to send a clear message of unity versus China, G7 officials are likely to find that domestic disunity undermines any grand pronouncements, let alone bold joint actions.

Biden is sure to confront a torrent of questions about default risks. In just a matter of weeks, says US Treasury Secretary Janet Yellen, Washington will run out of cash. If so, all hell would break loose for every economy represented in Hiroshima – and those far beyond.

“If it does ultimately default on US Treasuries this would undermine the integrity of the world’s most popular ‘risk-free’ asset used in central bank reserves, low-risk private investments and as collateral,” says economist Will Denyer at Gavekal Research. “It would disrupt the global financial system and undermine the reserve status of dollar-denominated assets.”

Between Japan, China and other major Asian holders of US government debt, this region is sitting on somewhere near US$3.5 trillion of Treasuries. Yet Asia’s real exposure is its trade-reliant economies, which would be completely upended by the resulting surge in global bond yields, plunging share prices and gyrating exchange rates.

Even just the risk of the US missing a bond payment would do monumental damage. Joseph Abate, strategist at Barclays Plc, thinks US coffers might dip below $50 billion between June 5 and June 15. “Even this amount is too close for comfort a week or so ahead of mid-June tax date,” Abate says.

Adding to the dramas facing the G-7, this is a 100% self-inflicted threat to the global system manufactured in Washington by craven US lawmakers.

Craven: US Speaker of the House of Representatives Kevin McCarthy could soon preside over the first ever US debt default. Image: CNN Screengrab

Sushil Wadhwani, chief investment officer at PGIM Wadhwani, notes that “in an increasingly polarized environment, politicians will need to see significant market turbulence in order to reach an agreement.”

As such, Wadhwani adds, “there’s a concern that the market is being complacent and that investors could be in for a sudden shock. Investors would not want to see unexpected fiscal tightening at a time when the risks of a US recession are already rising, and the possibility of a hard landing is increasing.”

All this plays right into China’s hands. To be sure, Chinese leader Xi Jinping won’t welcome how a US default derails his economy’s ability to meet this year’s 5% growth target. Nor would Beijing be happy suffering epic losses on the $865 million worth of US Treasury securities it owns.

Yet Kishida’s Japan would lose more on its $1.1 trillion of US government debt. And by playing Russian roulette with America’s credit rating again, the Republicans led by US House of Representative Speaker Kevin McCarthy would make Xi’s case for him that the global economy needs an alternative to the dollar.

“Again,” because the last time Republicans played games with raising the debt ceiling on Washington’s ability to borrow, in 2011, Standard & Poor’s yanked away its AAA credit rating.

As this reckless game plays out anew, Xi’s pro-yuan lobbying effort gets that much easier. If not the yuan, perhaps a “BRICS” currency, as Brazil, Russia, India, China, South Africa, and other anti-dollar-hegemony factions join forces.

One could argue decoupling efforts are a nuclear option all their own. The trade wars that former president Donald Trump launched against China from 2017 to 2021 disrupted US-China dynamics plenty. But Biden’s surgical focus on Chinese companies’ access to vital technology – and US prodding of allies to join in – accelerated the decoupling train.

This weekend’s stop in Hiroshima is an opportunity to gain broader clarity on what would constitute an economic divorce from China Inc and, more importantly, how to do it without wrecking Asia’s 2023 and beyond. Even the basic terminology is complicated, with some G-7 members and other leaders visiting Hiroshima favoring “de-risking” phraseology.

Biden’s White House has ambitious plans for the weekend. As the Wall Street Journal reports, “the US and its allies are poised to increase pressure on China” with “an expected joint statement rejecting use of economic retaliation against nations over policy disputes and other disagreements.”

The WSJ adds that “the anticipated statement isn’t expected to mention any country by name” but “comes as concerns mount among the US and its allies over Beijing’s increasing use of what its critics call ‘economic coercion’ to show its displeasure with other countries.”

US-China decoupling’ is gathering pace as global nations are pressured to take sides. Image: iStock

A wrinkle that few saw coming is how Europe’s position toward China has in many ways become more adversarial than Biden’s. This might open an opportunity for the US to take something of a middle ground. Even so, leaders of the largest and mid-size industrialized economies will find severing commercial ties with China all but impossible.

Even just discerning where G-7 economies end and China begins will be a Herculean task. Chatter about reshoring industry, ring-fencing supply chains and tech self-sufficiency makes for great politics but precarious economics from Washington to Berlin to Tokyo.

Yet a recent report from S&P Global Ratings calls the process “unavoidable” despite the growing knowledge that it “will be costly” for the global economy.

“Global tech’s transition away from China will strain efficiencies and may consume much management focus over the next three to five years,” argues S&P credit analyst Hins Li. “Moreover, firms that move capacity out of China risk losing some access to that market, which many entities rely on for much of their growth.”

Nevertheless, Li points out, all available data show that the tech industry’s biggest global players are loosening their China ties. The catalysts range from China’s production disruptions amid Covid-19, geopolitical tension and a sharp escalation in curbs on tech exports. This generated a bull market in “concentration risk” in boardrooms around the globe.

In its report, S&P zeroes in on global laptop production. In 2021, China’s share of global laptop production topped 80%. By 2025, S&P thinks that share will fall by at least 10-20 percentage points. This will be a direct result of tech’s biggest names redistributing manufacturing capacity out of Xi’s economy.

For handsets, S&P estimates China’s share of production will drop by between 5 percentage points and 15 percentage points by 2025. The proportion of iPhones that Apple Inc makes in China will drop as rivals like India raise their manufacturing games. S&P notes that India’s iPhone industry will likely at least double by 2025. That compared to today’s mid-single digit percentage of total production.

“Spreading out operations won’t be as efficient as utilizing giant factories in China, which maximize economies of scale and draw on existing robust supplier networks, infrastructure, and talent pools,” S&P writes. “Some companies may retain redundant capacity in China in case they encounter production hiccups while ramping up new sites.”

Even so, this weekend’s G-7 talks are just as likely to get bogged down in petty infighting and a torrent of sideline topics that leaders will bring to Hiroshima. In addition to Biden’s debt default nightmare, French President Emmanuel Macron faces public outrage back home over steps to raise the national retirement age from 62 to 64 later this year.

Macron’s team, meantime, is feuding with Italian Prime Minister Giorgia Meloni, which it has called a “far-right government” with a policy mix “incapable of fixing Italy’s migration problems.”

Ukraine says it needs bigger and better weapons to defeat Russia. Image: Twitter / New Statesman

The G-7 confab also comes as Ukraine seeks additional aid, both financial and military, and Russia continues to dig in for the long haul. Along with worries about Vladimir Putin’s threats to use tactical nukes in the conflict, G-7 leaders are sure to be questioned about how Moscow’s economy is skating around global sanctions quarter after quarter. Support for Taiwan will come up early and often, too.

Also likely to come up in G-7 discussions and press conferences: Turkish President Recep Tayyip Erdogan’s political survival instincts ahead of a May 28 runoff election. This drama in Turkey, a NATO member, will matter greatly for the course of everything from Russia-Ukraine dynamics to the state of play in the Middle East.

Still, the 800-pound gorilla in the room during any of these discussions will be the default insanity following Team Biden at every turn. Defusing that existential threat to global stability 7,000 miles away in Washington will be easier said than done.

Follow William Pesek on Twitter at @WilliamPesek

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Maid found guilty of murdering employer’s 70-year-old mother-in-law

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SINGAPORE: A domestic helper from Myanmar who stabbed her employer’s elderly mother-in-law to death in 2018 was found guilty of murder on Thursday (May 18).

Delivering the verdict, Justice Andre Maniam said that Zin Mar Nwe, then 17, had stabbed the 70-year-old victim, after the elderly woman had threatened to send her back to her agent. 

He rejected the defence’s arguments that Zin Mar Nwe, now around 22, had not been conscious of the stabbing, that she was in a dissociative state of mind, or that she was suffering from an abnormality of mind. 

“The accused’s decision to stab the deceased was an emotional, irrational one. But that, per se, does not mean that the accused was suffering from an abnormality of mind caused by mental illness,” said Justice Maniam. 

The court previously heard that Zin Mar Nwe arrived in Singapore on Jan 5, 2018. While her passport stated her age as 23, investigations later revealed she was 17. 

After two employers, Zin Mar Nwe began working for the victim’s son-in-law on May 10, 2018. She stayed with her employer, his wife and two teenage daughters. 

The victim arrived in Singapore from India on May 26, 2018, intending to stay with the family for a month. The victim and her family members cannot be named due to a gag order. 

On Jun 25, 2018, after a dispute between the two women, the victim told Zin Mar Nwe that she would be sent to her agent the next day. 

Zin Mar Nwe then took a knife and approached the victim – who was watching television – and stabbed her 26 times until she stopped moving.

After this, Zin Mar Nwe broke a lock on a cupboard in the master bedroom and retrieved her belongings. She washed the knife and changed into a dress before leaving the flat. 

She went to her maid agency to request for her passport but left when she heard agents say that they were about to call her employers. 

Zin Mar Nwe then wandered around Singapore for about five hours before returning to the agency, where she was arrested.

After her arrest, Zin Mar Nwe gave various accounts of the incident in statements to the police, including that the victim had been killed by two fictitious dark-skinned men, noted Justice Maniam. 

During the trial, Zin Mar Nwe sought to rely on the partial defence of diminished responsibility, on the basis that she suffered from mixed anxiety and depressive reaction or adjustment disorder with mixed anxiety and depressed mood at the time of the killing.

She relied on the defence’s expert witness, psychiatrist Tommy Tan, to argue that she was in a “dissociative state” and could not control or remember her acts when she was stabbing the victim.

Zin Mar Nwe also claimed that the victim had abused her, including scalding her with a heated pan, hitting her with her hands, or with other implements.

Justice Maniam rejected the defence that Zin Mar Nwe was in a dissociative state, as this would be inconsistent with her behaviour in the aftermath of the stabbing.

“From what she told the police, she reacted in anger at the deceased, and she was aware of what she was doing. Indeed, she described the stabbing in detail. I do not accept that she was not conscious of what she was doing,” said Justice Maniam.  

He also rejected that she was suffering from adjustment disorder. 

The judge accepted that the victim had hit Zin Mar Nwe to get her attention or to reprimand her, and that the victim had also retaliated when Zin Mar Nwe accidentally hurt the victim on certain occasions. 

However he noted that from what Zin Mar Nwe said, the victim’s treatment of the domestic helper would not have caused the stabbing. 

“The accused did not report the deceased’s treatment of her to her employer or his family members, or to her agent, or to her family. It seems that she was willing to tolerate such treatment, although she was hurt, sad, and felt unappreciated,” said the judge. 

However, Zin Mar Nwe feared being sent back to the agent and being returned back to Myanmar in debt, and the deceased’s threat to send her back to the agent triggered the stabbing, he added. 

Addressing Zin Mar Nwe, Justice Maniam said: “I find that the accused has failed to establish the defence of diminished responsibility. That was the sole basis on which the accused resisted the charge of murder, the elements of which are established on the evidence.” He then convicted Zin Mar Nwe. 

Addressing the court on sentencing, Deputy Public Prosecutor Kumaresan Gohulabalan said that the prosecution will not be seeking the death penalty. Zin Mar Nwe is represented by lawyer Christopher Bridges, under the Legal Assistance Scheme for Capital Offences. 

The judge then directed parties to file submissions within four weeks before scheduling the sentencing hearing for a later date. 

For murder, Zin Mar Nwe can be sentenced to death or life imprisonment. She cannot be caned as she is a woman.

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The fight to finance Japan’s historic defense splurge

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Japanese Prime Minister Fumio Kishida’s administration dramatically increased Japan’s 2023 defense budget by 26.3% in 2022 to 6.82 trillion yen (US$52 billion).

During former prime minister Shinzo Abe’s leadership, the defense budget steadily increased to 5.3 trillion yen ($39 billion) but stayed between 5-5.2% of the whole government budget. Kishida has now increased the defense budget to 5.9%.

Future obligations concerning new contracts for the updated Defense Build-up Program amount to 7.06 trillion yen ($52 billion). As procurement takes several years, Japan is making as many contracts as possible in the first year of the program to deliver equipment to the Self-Defense Force (SDF) units swiftly.

As of May 2023, a month from the start of the Japanese financial year, the government had already announced a 380 billion yen ($2.8 billion) contract with Mitsubishi Heavy Industries to upgrade and mass-produce Type-12 surface-to-ship missiles. The government also signed a 110.4 billion yen ($816 million) contract with the United States to purchase 400 Tomahawk cruise missiles.

In the next five years, Japan plans to spend 43 trillion yen ($330 billion) on defense. In 2027, the defense budget will reach 9 trillion yen ($66 billion), equivalent to 2% of Japan’s gross domestic product (GDP) in 2023.

Though this means that Japan might not achieve its 2% GDP goal in 2027, Japan is poised to become the third-largest military spender in the world.

Internationally, US President Joe Biden’s administration welcomes such Japanese efforts, and there are already voices requesting more. But domestically Kishida is carefully balancing Japan’s wallet and bullets.

To cover the new defense spending increases, the Kishida administration squeezed 4.8 trillion yen ($35 billion) out of the 2023 financial surplus, spending cuts and non-tax revenues in the 2023 financial year.

Out of these 4.8 trillion yen, 1.4 trillion yen ($10.3 billion) were allocated to the 2023 budget and the other 3.4 trillion yen ($25 billion) are being saved for spending over the next four years.

Japanese Prime Minister Fumio Kishida rides on a Japan Ground Self-Defense Force Type 10 tank during a review at JGSDF Camp Asaka in Tokyo on November 27, 2021. Photo: JiJi

The Japanese government runs on a single fiscal year basis, which is incompatible with saving money for the future. Hence the government is trying to pass a “bill on special measures for securing financial resources for the substantial reinforcement of Japan’s defense capabilities.”

With this legislation, the government is now able to establish a Defense Reinforcement Fund, which will pool non-tax revenues for future defense spending.

While the Ministry of Finance does its best to fund the defense budget within its rights, it cannot be said that these revenue sources are reliable.

The Public Finance Law requires that at least half of the budget surplus in each fiscal year be allocated for the redemption of government bonds and the remainder has traditionally been used to finance the following year’s supplementary budget.

While the budgetary surplus has increased recently due to the unused emergency Covid-19 fund, there is no justification to appropriate unnecessary items to intentionally make a surplus.

Spending cuts will get harder due to aging society and increasing social welfare spending. Kishida also promises to double the child-related budget. One of the government’s non-tax revenue sources, the Foreign Exchange Fund, recorded a surplus because of the depreciation of the yen last year and the increasing interest rates in foreign currencies.

Still, as this account’s purpose is to buffer the damage of volatility in foreign exchange, it is not guaranteed to increase the defense budget. Other non-tax revenues, including the Fiscal Investment and Loan Program or capitalizing government properties, are also unsustainable.

The funding of defense expenditures has caused an ongoing struggle between the tax hike faction and the debt financing faction within Kishida’s ruling Liberal Democratic Party (LDP). In December 2022, the Kishida administration announced that it mobilized one-quarter of the defense budget increases from newly raised taxes following the Ministry of Finance line.

This announcement frustrated LDP politicians who have criticized tax hikes and instead called to issue additional national bonds. Chairman of the LDP Policy Research Council Koichi Hagiuda said that the government has to do its best to find non-tax means before discussing taxation.

LDP politician Shigeharu Aoyama also argued that a tax hike for the defense budget is not justifiable, saying that national defense is the responsibility of the state, not a beneficiary liability. Aoyama also dismissed the government’s labeling of tax revenue as a stable source of income, saying that it is heavily affected by economic circumstances.

The anti-tax hike faction insists on using government bonds for defence build-up, including construction bonds, which have been used for Japan Coast Guard shipbuilding.

Japanese navy ship flying flag. Photo: iStock
A Japanese navy ship flying its flag. Photo: iStock

Answering these demands, the government has provisionally approved using construction bonds for defense, including 245.4 billion yen ($1.8 billion) for Ministry of Defense and SDF facilities and 188.8 billion yen ($1.4 billion) for shipbuilding.

But this is still only 1% of the 43 trillion yen ($330 billion). Other politicians have several ideas to source funds, such as accepting donations, removing the redemption period of the national debt and issuing defense bonds, which Abe suggested before his passing. Still, Minister for Finance Shunichi Suzuki is cautious of these measures, and the Ministry of Finance remains hesitant to rely on bonds.

The government may have to choose between raising taxes or debt financing, which includes expanding the coverage of construction bonds for more SDF facilities or issuing historic defense bonds for its defense build-up if it cannot mobilize the necessary capital as planned.

While the Japanese government has to make its economy resilient against higher inflation rates in the case of debt financing, it must also accomplish economic growth in the case of a tax hike. The monetary policies of the Bank of Japan, which already holds almost half of all government-issued bonds, may also be the key.

While the discussion on defense spending figures and SDF capabilities remains important, scholars must also continue to closely monitor the relationship between Japan’s economic situation and defense policies.

Ryosuke Hanada is PhD candidate in the Department of Security Studies and Criminology at Macquarie University.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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War rooms and bailouts: How US is preparing for a default

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Convening war rooms, planning speedy bailouts and raising house-on-fire alarm bells: Those are a few of the ways the biggest banks and financial regulators are preparing for a potential default on US debt.

“You hope it doesn’t happen, but hope is not a strategy – so you prepare for it,” Brian Moynihan, CEO of Bank of America, the nation’s second-biggest lender, said in a television interview.

The doomsday planning is a reaction to a lack of progress in talks between President Joe Biden and House Republicans over raising the US$31.4 trillion debt ceiling – another round of negotiations took place on May 16, 2023.

Without an increase in the debt limit, the US can’t borrow more money to cover its bills – all of which have already been agreed to by Congress – and in practical terms that means a default.

What happens if a default occurs is an open question, but economists – including me – generally expect financial chaos as access to credit dries up and borrowing costs rise quickly for companies and consumers.

A severe and prolonged global economic recession would be all but guaranteed, and the reputation of the US and the dollar as beacons of stability and safety would be further tarnished.

But how do you prepare for an event that many expect would trigger the worst global recession since the 1930s?

‘Default doomscrolling’ again, Mr. Powell? Photo: Kimimasa Mayama / Pool Photo via AP / The Conversation

Preparing for panic

Jamie Dimon, who runs JPMorgan Chase, the biggest US bank, told Bloomberg he’s been convening a weekly war room to discuss a potential default and how the bank should respond. The meetings are likely to become more frequent as June 1 – the date on which the US might run out of cash – nears.

Dimon described the wide range of economic and financial effects that the group must consider such as the impact on “contracts, collateral, clearing houses, clients” – basically every corner of the financial system – at home and abroad.

“I don’t think it’s going to happen — because it gets catastrophic, and the closer you get to it, you will have panic,” he said.

That’s when rational decision-making gives way to fear and irrationality. Markets overtaken by these emotions are chaotic and leave lasting economic scars.

Banks haven’t revealed many of the details of how they are responding, but we can glean some clues from how they’ve reacted to past crises, such as the financial crisis in 2008 or the debt ceiling showdowns of 2011 and 2013.

One important way banks can prepare is by reducing exposure to Treasury securities – some or all of which could be considered to be in default once the U.S. exhausts its ability to pay all of its bill. All US debts are referred to as Treasury bills or bonds.

The value of Treasurys is likely to plunge in the case of a default, which could weaken bank balance sheets even more. The recent bank crisis, in fact, was prompted primarily by a drop in the market value of Treasurys due to the sharp rise in interest rates over the past year. And a default would only make that problem worse, with close to 190 banks at risk of failure as of March 2023.

Another strategy banks can use to hedge their exposure to a sell-off in Treasurys is to buy credit default swaps, financial instruments that allow an investor to offset credit risk. Data suggests this is already happening, as the cost to protect US government debt from default is higher than that of Brazil, Greece and Mexico, all of which have defaulted multiple times and have much lower credit ratings.

But buying credit default swaps at ever-higher prices limits a third key preventive measure for banks: keeping their cash balances as high as possible so they’re able and ready to deal with whatever happens in a default.

Four white men sit on white couches in a large office filled with presidential portraits.
Little has come out of fiscal negotiations between Mitch McConnell, left, Kevin McCarthy, second from left, President Joe Biden, second from right, and Chuck Schumer. Photo: AP via The Conversation / Evan Vucci

Keeping the financial plumbing working

Financial industry groups and financial regulators have also gamed out a potential default with an eye toward keeping the financial system running as best they can.

The Securities Industry and Financial Markets Association, for example, has been updating its playbook to dictate how players in the Treasurys market will communicate in case of a default.

And the Federal Reserve, which is broadly responsible for ensuring financial stability, has been pondering a US default for over a decade. One such instance came in 2013, when Republicans demanded the elimination of the Affordable Care Act in exchange for raising the debt ceiling. Ultimately, Republicans capitulated and raised the limit one day before the U.S. was expected to run out of cash.

One of the biggest concerns Fed officials had at the time, according to a meeting transcript recently made public, is that the US Treasury would no longer be able to access financial markets to “roll over” maturing debt.

While hitting the current ceiling prevents the US from issuing new debt that exceeds $31.4 trillion, the government still has to roll existing debt into new debt as it comes due. On May 15, 2023, for example, the government issued just under $100 billion in notes and bonds to replace maturing debt and raise cash.

The risk is that there would be too few buyers at one of the government’s daily debt auctions – at which investors from around the world bid to buy Treasury bills and bonds. If that happens, the government would have to use its cash on hand to pay back investors who hold maturing debt.

That would further reduce the amount of cash available for Social Security payments, federal employees wages and countless other items the government spent over $6 trillion on in 2022. This would be nothing short of apocalyptic if the Fed could not save the day.

To mitigate that risk, the Fed said it could could immediately step in as a buyer of last resort for Treasurys, quickly lower its lending rates and provide whatever funding is needed in an attempt to prevent financial contagion and collapse. The Fed is likely having the same conversations and preparing similar actions today.

A self-imposed catastrophe

Ultimately, I hope that Congress does what it has done in every previous debt ceiling scare: raise the limit.

These contentious debates over lifting it have become too commonplace, even as lawmakers on both sides of the aisle express concerns about the growing federal debt and the need to rein in government spending.

Even when these debates result in some bipartisan effort to rein in spending, as they did in 2011, history shows they fail, as energy analyst Autumn Engebretson and I recently explained in a review of that episode.

That’s why one of the most important ways banks are preparing for such an outcome is by speaking out about the serious damage not raising the ceiling is likely to inflict on not only their companies but everyone else, too. This increases the pressure on political leaders to reach a deal.

Going back to my original question, how do you prepare for such a self-imposed catastrophe? The answer is, no one should have to.

John W Diamond is Director of the Center for Public Finance at the Baker Institute, Rice University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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