National debt interest exceeds defense spending... Empire's decline clock 'ticking ticking'

The United States and Japan jointly intervened in the foreign exchange market on July 31 to prop up the Japanese yen, which had plummeted to a 40-year low against the dollar. The U.S. Treasury Department, through the Federal Reserve Bank of New York, sold euros to buy yen, while Japan's Ministry of Finance and the Bank of Japan injected approximately 13.8 trillion yen (about $126 billion) into the market. This marks the first time the two nations' monetary authorities have coordinated yen purchases since the 1998 Asian financial crisis.

U.S. Treasury Secretary Scott Bessent stated that the intervention was a preemptive measure to prevent an "Asian currency domino effect." He warned in a CNBC interview that "excessive yen weakness" partly triggered the 1997-98 Asian financial crisis and that yen stability is crucial for the entire region, as a significant yen depreciation could lead other currencies to follow suit. Bessent also noted excessive volatility in the South Korean won and an undervalued Chinese yuan.

However, foreign exchange market experts offer a different interpretation. They believe the U.S. Treasury's underlying goal is to prevent a sell-off of U.S. Treasury bonds. Japan holds $1.14 trillion in U.S. debt as of May, making it the largest foreign holder. To fund yen defense, Japan might otherwise sell these bonds, potentially driving already high U.S. interest rates even higher. Instead of selling bonds, Japan secured dollars through the Fed's Foreign and International Monetary Authorities (FIMA) repo facility. This intricate arrangement, involving the U.S. selling euros for yen and Japan using repo instead of bond sales, highlights the U.S.'s primary fear: a crack in its own Treasury market.

The U.S. faces a precarious fiscal situation, with national debt reaching $31.265 trillion in March, equivalent to 100.2% of its GDP. This debt-to-GDP ratio, exceeding 100% for the first time since 1946 (excluding the COVID-19 period), is projected by the Congressional Budget Office to reach record highs by 2030 and climb to 120% by 2036 and 175% by 2056 if current trends continue. More alarming than the debt's sheer size is the cost of servicing it. Last year, interest payments alone amounted to $970 billion, and this figure is expected to surpass $1 trillion this year. The Committee for a Responsible Federal Budget estimates that if current interest rates persist, interest costs could reach $2.5 trillion by 2036, with interest payments consuming 30% of federal revenue, up from 19% last year. This means the U.S. could be collecting $3 in taxes for every $1 spent on interest.

This fiscal challenge morphs into a financial one. Just as a bank run occurs when depositors doubt a bank's solvency, a bond sell-off can happen when investors doubt a government's ability and willingness to repay its debt. Historically, U.S. Treasury bonds have been a safe haven during crises. However, the market has treated dollar assets as a source of crisis rather than refuge, leading to bond sell-offs following events like former President Donald Trump's "Day of Liberation" tariff announcement in April last year and recent concerns about Federal Reserve Chair Jerome Powell's commitment to price stability. The erosion of the U.S. Treasury's safe-haven status is a symptom of American decline. Escaping this requires fiscal austerity, including spending cuts and tax increases. Yet, the Trump administration has expanded deficits through large tax cuts and increased military spending, requesting a rise in defense spending from $961.4 billion this year to $1.5 trillion next year. Self-inflicted tariff wars, reckless military gambles, and undermining the Federal Reserve's independence have led to bond sell-offs, a direct consequence of Trump's actions.