North America Observation丨Debt Monetization: Is the U.S. Preparing to "Harvest" the World Again?
On May 28, local time, U.S. President Joe Biden unveiled his administration's first fiscal budget proposal, priced at a staggering $6 trillion, with a budget deficit of $1.84 trillion. This move has drawn global attention, raising concerns among many nations over whether the U.S. is once again resorting to debt monetization to "harvest" the world.
Biden's proposed $6 trillion budget encompasses several key domestic sectors, including infrastructure development, education, healthcare, and climate change initiatives. From a positive perspective, these investments aim to drive long-term economic growth, create more jobs, and enhance the U.S.'s competitiveness in the global economy. For instance, large-scale infrastructure investments could revitalize America’s aging transportation and energy systems, providing a stronger foundation for economic development.
However, the massive deficit accompanying this budget cannot be ignored. To cover the $1.84 trillion shortfall, the U.S. is likely to once again turn to debt monetization. Simply put, debt monetization occurs when the government issues bonds to raise funds, while the central bank prints money to purchase these bonds, thereby financing the government. While this approach may temporarily ease fiscal pressures, it poses significant long-term risks.
As the world's largest economy, the U.S. dollar dominates the global monetary system. When the U.S. engages in debt monetization, the flood of newly printed dollars into the market first leads to dollar depreciation. For countries and investors holding substantial dollar-denominated assets, this is nothing short of a nightmare—their asset values shrink as the dollar weakens, effectively "harvesting" their wealth. For example, many emerging markets hold large dollar reserves, and a weaker dollar directly erodes the real purchasing power of these reserves.
Moreover, dollar depreciation can trigger a surge in global commodity prices. Since most commodities are priced in dollars, a weaker dollar makes them more expensive in other currencies. Countries reliant on imported commodities will face imported inflationary pressures. Take oil, for instance—rising prices increase production costs, driving up overall prices and destabilizing economies and living standards in these nations.
Additionally, U.S. debt monetization may cause abnormal fluctuations in global capital flows. When the dollar supply expands and interest rates remain low, global investors seeking higher returns may withdraw funds from other countries back to the U.S., leading to capital outflows and declining asset prices in foreign stock and bond markets. Conversely, when U.S. monetary policy tightens, capital may rapidly flow back, creating severe volatility that could destabilize emerging markets and even trigger financial crises.
For the rest of the world, concerns over U.S. debt monetization are not unfounded. Historically, the U.S. has repeatedly shifted the burden of its domestic economic crises onto other nations. To counter this potential "harvesting," countries must remain vigilant—strengthening domestic economic restructuring to reduce dollar dependency while enhancing international financial cooperation to collectively mitigate risks and safeguard global economic and financial stability.
