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Is the United States heading for a liquidity crisis? [1]
['This Content Is Not Subject To Review Daily Kos Staff Prior To Publication.']
Date: 2025-04-08
A Treasury Market in Decline
There are ominous signs that all is not well in the U.S. Treasury market. In recent months, several countries, including major holders like China and Japan, have been selling off some of their holdings of US Treasury bonds, indicating a shift in global financial strategy and concerns about rising US interest rates and economic uncertainty. In a new wrinkle, foreign central banks are also initiating buyers’ strikes of U.S. Treasuries in response to Trump’s absurd trade war.
A Liquidity Crisis in the Making
As other nations sell large amounts of U.S. Treasury bonds, it increases the supply of these bonds in the market. If demand doesn't keep pace with this increased supply, the price of Treasuries can fall. To attract buyers and compensate for the lower prices, the U.S. government may have to offer higher interest rates (yields) on newly issued Treasuries. A large and sudden sell-off could lead to a decline in market depth, meaning fewer buyers and sellers available at various prices, which could make it harder to execute large trades without significantly impacting the price. In other words, reduced liquidity.
The Impact on the US Economy
This would likely lead to a rise in interest rates, potentially increasing the cost of borrowing for the U.S. government and impacting financial markets. This flies in the face of Trump’s call for lower interest rates, which would be nearly impossible due to decreased demand for U.S. Treasury bonds. Worse still, with Trump’s call for the $5.4 trillion tax cuts, mostly for the wealthy, coupled with a crashing economy and resulting reduced revenue, the U.S. debt is on course to accelerate over $50 trillion far earlier than the CBO estimates.
These challenges couldn’t come at a worse time, as the current debt-ceiling standoff could trigger payment and default risks as early as this summer if the Republicans don’t reach a deal in the coming months.
Ultimately, difficulty in selling new Treasury bonds could make it more challenging for the U.S. government to fund its deficit. The whole situation seems to be teetering on the brink of a calamitous situation. It’s difficult to find any comfort knowing the clown posse is running the show in Washington DC.
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