Nouriel Roubini calls the U.S. dollar and U.S. bonds a Ponzi scheme, CZ: Discussing from a personal debt perspective is a common bias.

Famous cryptocurrency YouTuber BrainBrother recently released a video titled "Is the US Dollar and US Debt a Ponzi Scheme?" In the video, BrainBrother explores the operation mode of the US dollar and US debt in a simple and understandable way, analyzing whether they exhibit characteristics of a Ponzi scheme, sparking discussions within the community. On the other hand, researcher Yu Zhe'an responded to the arguments in this video, raising several relevant facts while explaining his personal views. He stated that using the logic of private debt to analyze national debt is an incorrect analytical approach.

What is U.S. Treasury Bonds?

U.S. Treasury Bonds are a type of "IOU" issued by the U.S. government to raise funds for infrastructure, social welfare, defense, and other expenditures. In simple terms, the government borrows money from investors by issuing Treasury Bonds and promises to repay the principal with interest in the future. U.S. Treasury Bonds come in different maturities: short-term Treasury Bills, medium-term Treasury Notes, and long-term Treasury Bonds.

Due to the government's backing, U.S. Treasury Bonds are generally considered a stable and secure investment, favored by countries worldwide and major financial institutions. With a massive market size, they are essential assets in the international financial market.

Are U.S. Debt and the Dollar a Ponzi Scheme or Financial Reality?

Brain Brother stated that the U.S. debt-to-GDP ratio is 123%, indicating that it would take the entire U.S. population of 330 million people a year without food or drink to repay the debt. Despite multiple increases in the debt ceiling, the U.S. continues to borrow each year, which he views as a "robbing Peter to pay Paul" Ponzi scheme that could eventually lead to a debt default and a global financial disaster.

Brain Brother criticized the U.S. for continuously printing money to support the government, creating a loop. This unlimited borrowing model erodes purchasing power, leading to inflation that diminishes asset values, making ordinary people poorer as they save.

He further explained that even if the yield and coupon rate of U.S. bonds are aligned, it does not mean they are without risk, especially as the U.S. continues to borrow and the national debt grows. He emphasized vigilance against seemingly stable figures as the U.S.'s fiscal situation is concerning and could potentially trigger an economic crisis.

Is it a Fallacy to View Public Debt through Private Debt Lens?

In response to Brain Brother's argument on the U.S. debt-to-GDP ratio, Yu Zhe'an cited Japan as an example where the debt-to-GDP ratio exceeds 250% without a fiscal collapse. Relying solely on the debt-to-GDP ratio to gauge a country's debt health is incomplete. He added that viewing public debt through the lens of private debt is erroneous. The public sector operates differently from the private sector, as it does not rely on existing income to determine spending but arranges expenditures first and then seeks revenue.

He emphasized that fiscal deficits are not a systemic problem because the government's debt repayment methods are not limited to income; the government can repay debt by:

1. Increasing economic growth above the real interest rate
2. Ensuring the inflation rate exceeds the nominal interest rate
3. Having fiscal revenues exceed expenditures

Fiscal revenues and expenditures account for only about 30% to 40% of past U.S. debt repayments, with economic growth contributing more than 50% to debt repayment. The government can offset new currency supply by increasing the overall demand for money in society through economic growth and various other methods, which is another form of debt repayment.

Inflation: Exploitation or Redistribution?

Brain Brother pointed out that inflation not only erodes people's savings but also exacerbates wealth inequality. However, Yu Zhe'an argued that inflation is, in fact, a mechanism for "resource redistribution." Banks create purchasing power through loans to support those who can fully utilize resources, gradually shifting resources into the hands of more efficient users. This implicit wealth transfer, while disadvantageous to some, holds value in resource allocation within the overall economic system.

The Mechanism Behind U.S. Bonds: Facilitating Borrowing or Economic Stability?

Brain Brother criticized the frequent raising of the U.S. debt ceiling, noting that since the outbreak of the pandemic, the debt has surged from $23 trillion in 2019 to $35 trillion by 2024. The U.S. debt ceiling has been raised 78 times, with each instance reaching the limit and necessitating further legislative adjustments, suggesting a designed "bottomless pit" for convenient borrowing.

However, Yu Zhe'an explained that before the establishment of the debt ceiling in 1917, each debt issuance required congressional approval, which was cumbersome and limited the government's ability to respond to economic fluctuations. Thus, a "flexible" debt ceiling was created. Adjusting the limit in response to economic demands stabilizes the economy and is not as unrestrained as portrayed by Brain Brother.

The U.S. Dollar as the Global Financial Hegemon: Is the Unlimited "Printing Press" a Risk?

Brain Brother referenced the saying "the U.S. won't fall because it has a printing press" and related data to indicate that the U.S. central bank's holdings of U.S. debt closely track government issuance, suggesting an economic loop: the U.S. government spends and borrows, and when unable to repay, the central bank prints money. This continuous cycle could eventually have a severe impact on the global economy.

However, Yu Zhe'an stated that currency is a system, a resource allocation mechanism with a lifespan. If it becomes unusable, it can be replaced with the next version. Transitioning systems incurs costs but is not akin to doomsday.

He further emphasized that the U.S. accounts for about 20% of global GDP but holds a 50% share in global cross-border financing, trade, and settlements, making the U.S. dollar's position challenging to shake. In this scenario, U.S. bonds have become a stabilizing pillar in the global financial system. Despite the annual increase in U.S. national debt, the U.S. retains the authority to print money and a global currency status, leveraging these advantages to garner long-term market support and maintain financial stability.

Debate on the Crisis of U.S. Bonds Remains Inconclusive

Updated on 10/16 1:50

In conclusion, both Brain Brother and Yu Zhe'an have not definitively concluded on the crisis of U.S. bonds. While some argue that the U.S. borrowing model and dollar printing mechanism may lead to an unsustainable scheme, ultimately culminating in a crisis, Brain Brother's final remarks did not lean towards this view. He emphasized the importance of purchasing power, passive investment, and continuous learning, stating, "Forget about things related to money because time is your most important asset."

On the other hand, Yu Zhe'an offered a macro perspective, asserting that national debt differs from private debt, with the logic of the public sector distinct from private enterprises. Government debt can be stabilized through economic growth, inflation, and balancing revenue and expenditure.

Both viewpoints remind us that a deep understanding of various perspectives on economic issues is crucial for a holistic view of U.S. Treasury Bonds and their global impact. Additionally, focusing on personal growth and learning is a key factor in avoiding negative impacts from macroeconomic changes.