Japan has the highest debt-to-GDP ratio in the world, at more than 200%. There are many critics of the Japanese government and its efforts to keep debt-to-GDP ratios over 200%. However, supporters of Japan’s debts make the point that the majority of it’s debt is owned by domestic Japanese institutions, including insurance companies, pension plans and banks. The Bank of Japan is also a major holder of Japanese debt. This is quite relevant, as Japanese culture tends to be homogenous. The Japanese think in a similar way in terms of economic and political issues. If no one in the country is suffering from the debt-to-GDP ratio, there is no problem maintaining it.
The situation is completely different when it comes to the USA. If you look at the US Treasury market, foreign ownership is constant due the value of the US dollar, which plays a significant role in international markets. However, overall ownership has decreased as a percentage, mostly because the US market is growing.
Greenbacks are not welcomed
Foreign ownership of US Treasuries has dropped in the last 6 years from 50% to around 40%, which is quite significant. US Treasury note auctions have seen decreased interest from foreign markets, making the US treasury more dependent on buying by the US banks instead. Also concerning is that US Treasury note issuance is increasing due to the increase in US economic deficits. Fed-buying is moving in a negative direction because of the Fed’s quantitative tightening program’, making it difficult for America to print money.
It is not difficult for US Treasuries to find a buyer. Even if they are unable to gain foreign interest, the Fed can compel US banks to buy the Treasuries. Interest rates will increase if the USA continues with policies based on keeping foreign buyers out of the equation. Eventually the liquidity will dry up. This will make economic growth slow down, and could cause flash crashes in the US market. China could take advantage by getting into the US treasury market. With China acting as an enemy in the ongoing trade wars it would be difficult for the US treasury to get deficits under control without changes to its current policies.
Putin has given a warning
Russia is another big player in this situation. The President of Russia Vladimir Putin has issued a numerous statements citing his concern over the global system’s dependence upon US dollar-based payment systems. Putin’s argument becomes increasingly valid, as US deficits are increasing with each day and the world is watching. Russia has already started buying around 30 tons of gold per month, and their gold reserves have climbed from 600 tons to 2,000 tons in the past 10 years. Russia is also working to build a digital distributed ledger, which would support a Russian-backed cryptocurrency that would be backed by gold instead of by fiat currency.
The Chinese are also trying to dominate the global economy. They also want to move towards an alternative global payments system instead of SWIFT. Many other countries support these efforts by the Russians and Chinese.
A new payment system would not include America or US dollars. However, it would create a new platform for other counties to settle their balance of payments without involving SWIFT or Fedwire , both of which rely on America and US dollars. This means that the USA wouldn’t have the same control over the global market with sanctions. Countries could depend on an alternative payment system. According to Putin, Russia is quite close to achieving this target.