To The Moon

High debt should not be ignored—but nor should it be exaggerated. For now, investors have little reason to panic. The US is far from a debt crisis, and has ample flexibility to manage risks ahead.

• In recent months, heightened attention has been paid to the United States’ growing debt burden.

• With a debt-to-GDP ratio reaching 124% in 2024, many investors and media commentators have raised concerns about fiscal sustainability, rising interest expenses, and the potential crowding-out of future government investment.

• These fears have intensified in an environment of elevated interest rates and persistent budget deficits.

Debt-to-GDP Ratios in 2024:

1. Why a High Debt-to-GDP Ratio Is Not Necessarily a Problem

• Debt-to-GDP is a ratio: GDP is the denominator, so as long as economic growth outpaces debt accumulation, the ratio can decline.

• Japan has sustained a debt-to-GDP ratio exceeding 200% for years without triggering a financial crisis.

• Japan’s example demonstrates that "high debt ≠ immediate crisis"—but it does come with long-term structural trade-offs.

• While a crisis may not occur overnight, excessive debt can gradually erode a country’s competitiveness and economic dynamism. This is the path the US should avoid.

2. Structural Challenges That Come with High Debt:

1. A heavily indebted government has less fiscal space to invest in growth-enhancing areas like infrastructure, innovation, or education, as more revenue is devoted to interest payments.

2. Under persistent debt pressure, governments (as seen in Japan) often resort to conservative and maintenance-oriented fiscal and monetary policies, avoiding bold reforms.

3. High debt levels lead to prolonged low interest rates, which result in capital misallocation:

   • To keep debt serviceable, central banks are compelled to keep interest rates artificially low.

   • This creates excess liquidity, but few productive investment opportunities.

   • Companies respond by hoarding cash or repurchasing shares instead of investing in innovation and capacity expansion.

3. Who Owns US Debt?

• As of February 2025: The top 2 Major Foreign Holders of Treasury Securities

  • Japan holds $1.13 trillion in US Treasuries

  • China holds $784 billion

  • Combined foreign holdings = $1.91 trillion

4.Debunking the Fear of Foreign Sell-Offs

• There is a widespread narrative suggesting that Japan and China—two of the largest foreign holders of U.S. Treasuries—might suddenly dump their holdings. Such a move, critics warn, could cause a sharp spike in bond yields, crash Treasury prices, and destabilize global markets.

5.In reality, the panic is overstated. Here's why:

1. A full-scale sell-off is highly unlikely.

   • Both Japan and China have strategic reasons to continue holding U.S. Treasuries.

   • These assets are still among the most liquid, stable, and widely accepted in the world.

   • Politically, an aggressive unwind could be seen as hostile and would likely trigger financial and diplomatic repercussions—especially in the backdrop of ongoing trade negotiations with the U.S.

2. Even in an extreme scenario, the U.S. has powerful tools to absorb such a shock.

   • Since June 2022, the Federal Reserve has reduced its balance sheet by over $2.3 trillion through Quantitative Tightening (QT) without triggering market chaos.

   • During the COVID-19 crisis, the Fed added nearly $4 trillion to its balance sheet via Quantitative Easing (QE)—demonstrating its ability to inject liquidity rapidly when needed.

   • Thus, if Japan and China were to jointly sell down their combined $1.9 trillion in U.S. Treasuries, the Fed could simply resume QE to soak up the supply. It has done more than that before.

6.What’s Possible for the Fed in an Extreme Scenario?

• As of April 2025, the Federal Reserve’s balance sheet stands at approximately $6.7 trillion, with $4.8 trillion in Treasury holdings—just 14% of the total U.S. federal debt (estimated at $35.5 trillion).
  → This suggests substantial capacity if the Fed chooses to expand its holdings further.

• In comparison, the Bank of Japan (BOJ) owns approximately 47.4% of outstanding Japanese Government Bonds (JGBs).

📌 Scenario 1: The Fed May Increase Treasury Holdings to 50%

• If the Fed were to raise its holdings of U.S. government debt from ~14% to 50%, mirroring BOJ’s level:

  • 50% of $35.5 trillion = approximately $17.75 trillion

  • This would require an increase in Treasury holdings from $4.8 trillion to $17.75 trillion—a net expansion of nearly $13 trillion.

📌 Scenario 2: The Fed May Scale Its Balance Sheet to Match BOJ’s Balance Sheet-to-GDP Ratio

• The BOJ’s total balance sheet is equivalent to roughly 152% of Japan’s nominal GDP.

• If the Federal Reserve scaled its balance sheet to a similar ratio relative to U.S. GDP (estimated at $28.8 trillion):

  • 150% × $28.8 trillion = approximately $43.2 trillion

  • This would represent an increase from the current $6.7 trillion to $43.2 trillion

Conclusion:

While mainstream media often presents high US debt as an imminent catastrophe, the evidence suggests otherwise.

• The US retains unparalleled advantages: the world’s reserve currency, deep capital markets, and powerful monetary tools.

• High debt should not be ignored—but nor should it be exaggerated.

• For now, investors have little reason to panic. The US is far from a debt crisis, and has ample flexibility to manage risks ahead.

Source:Infographics