Kevin McCarthy Chaos Puts Asia’s $3.5 Trillion In Jeopardy

Kevin McCarthy’s inability convince his peers to elect Kevin McCarthy as speaker has caused the House to stop and prevented any legislative business from taking place.

Washington should not forget that Republicans are dominating the U.S. House of Representatives, and they are falling apart.

Seeing the chaos around Congressman Kevin McCarthy’s campaign to be House speaker is a sign of amateurism. It’s also a warning to Asian governments about America’s financial management.

Kevin McCarthy Chaos Puts Asia’s $3.5 Trillion In Jeopardy
Kevin McCarthy Chaos Puts Asia’s $3.5 Trillion In Jeopardy

Some members suggested that votes to raise the U.S. Debt Ceiling -necessary to make U.S. payments- would only be possible if President Joe Biden’s Democrats agree to their priorities. Goldman Sachs believes Washington’s finances could dry up by July.

Asia has approximately $3.5 trillion in U.S. Treasury securities and is home to these foreign-exchange reserves. For example, in 2011, a group of Republican activists took the debt limit hostage. This gambit sent stock and bond markets reeling. Standard & Poor’s was forced to revoke the U.S.’s AAA credit rating.

Asia was left with post-traumatic stress disorder financial equivalent by the downgrade and the resulting turmoil. Although the U.S. might have the largest economy in human history and the Asian governments are the ones who own it, they still hold the keys. Japan and China both hold approximately $2.3 trillion U.S. IOUs, which suddenly put them in danger.

There are many reasons that Asian central banks should reduce their dollar exposure. One example is the U.S. national Debt exceeding $31 trillion. Inflation is at its highest point in 40 years. Add to that a Federal Reserve, which initially fell behind the tightening curve but now appears determined to drive the economy towards recession.

However, politicians playing with default is the last and most important thing Washington’s Asian bankers want, and it was eerily similar to the events 12 years ago.

America’s finances are already too tight, so 2023 could see faster moves by the S&P or Moody’s Investors Service, Fitch Ratings, and let the pro-default caucus know that it’s overstepping its bounds. Moody’s and Fitch could move faster to remove America’s AAA rating than S&P’s downgrade.

This is due to the cumulative PTSD from Covid-19 and all the financial baggage that the global economy has accumulated over the years.

Donald Trump’s 2017-2021 presidency caused credibility issues for the dollar, not only because of his Covid response. The first was a China trade conflict that harmed U.S. allies Japan and South Korea more than Xi Jinping’s economic health. Trump threatened to fire Jerome Powell, the Chairman of the Federal Reserve, to get rate cuts. Trump’s temptation to default on U.S. bonds left an impression in Asia.

Donald Trump’s administration considered canceling Chinese debt as a punishment in 2020.

Trump was on the 2016 campaign trail and wondered aloud if default could be used as a negotiation tactic. He told CNBC that he would borrow, knowing that default could be used as a negotiation tactic in the event of a crash. If the economy was strong, it was great. Therefore, you cannot lose.” The Washington Post reported in April 2020 that Trump officials were considering canceling Chinese debts as a punishment.

The Bank of Japan, People’s Bank of China, and their counterparts in Taipei, Hong Kong, Singapore, and Seoul have plenty to be concerned about in 2023. Policymakers are constantly busy with fears of a U.S. economic recession, an intensifying energy crisis in Europe, and a chaotic Chinese exit from “0 Covid” lockdowns.

Central bankers in Washington and Seoul are increasing borrowing costs to reduce overheating risk. There’s also the borrowing glut resulting from the pandemic.

Try $235 trillion if you think $3.5 trillion in U.S. Treasuries is too much. This is how much total private and public debt the International Monetary Fund estimates to be outstanding globally. This is even after a significant drop in 2021 -of approximately ten percentage points -as global economic growth returned.

Global gross domestic product was 247%, while total debt was 95% in 2007, before the Lehman Brothers crisis. This limits nations’ fiscal space, especially if 2023 is a year with red economic ink.

The world is also at greater risk if the House Republicans hold Washington’s credit rating hostage. Even if McCarthy is elected speaker, he will lead a caucus willing to destroy America’s credit to make a political point against Asia. Look out, world!

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Adam Collins
Adam writes about technology, business and economics. With master's degree in Economics, he's presented six papers in international conferences. As a solivagant in the constant state of fernweh, curiosity is the main weapon in his arsenal.

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