Is a U.S. debt default really coming? How unreliable is this concern from a technical perspective

Recently, there has been widespread discussion on social media about a potential default on U.S. debt. Some claim that a black swan event will occur in June, leading to a market crash; others warn that $6 trillion in maturing U.S. bonds will trigger a liquidity crisis. But are these predictions really valid? In fact, with a basic understanding of economics, it’s easy to see that many of these concerns contain logical flaws. The key to understanding the U.S. default issue lies in distinguishing different types of risks and recognizing the multiple mechanisms the U.S. government has at its disposal.

There Are Two Types of Default—Confusing Them Leads to Misinformation

Before discussing U.S. debt default, it’s essential to differentiate between two fundamentally different concepts. Many viewpoints confuse these scenarios, amplifying panic.

Technical Default: A Product of Political Deadlock

The first type is called a technical default, which essentially means the government’s books show it cannot pay, but in reality, it’s a conflict within Washington’s political system. This situation typically occurs when the debt ceiling cannot be raised.

Imagine a family managing finances: three siblings take turns managing the household, with the authority to print money and use credit separated. The one in charge can make purchases with a credit card but needs approval from the other two to increase the limit. If someone blocks approval due to policy disagreements, the person in charge cannot make payments—even if there’s enough money in the bank.

In 2011, the Obama administration and the Republican Party nearly caused a technical default over disagreements on healthcare reform and fiscal stimulus policies. Ultimately, they reached a compromise, and the crisis was averted. Historically, in democratic countries like the U.S., Japan, and Germany, true technical defaults are rare, and even when they occur, they do not necessarily mean the government cannot pay its debts—often, they are just the result of political gridlock.

Substantive Default: Nearly Impossible for the U.S.

The second type is a genuine default—where the government truly cannot meet its debt obligations. Countries like Argentina and Sri Lanka have experienced this. They owe foreign currency-denominated debt (like dollars or euros) and cannot print those currencies domestically, forcing them into default.

The U.S. is entirely different. The dollar is issued by the U.S. itself. If faced with an inability to pay, the federal government can simply increase the money supply through the Federal Reserve to meet its obligations. This is the privilege of the dollar as the world’s reserve currency. However, this privilege comes at a cost—massive money printing leads to inflation. During the pandemic, the U.S. government’s large-scale monetary easing caused the dollar to depreciate in hidden ways.

Since the collapse of the Bretton Woods system in 1973, the dollar has continuously depreciated against gold. But this isn’t unique to the U.S.—most major currencies worldwide are engaged in a “devaluation race.” Those who can control the pace of depreciation and maintain economic competitiveness can preserve their currency’s international status. This is the underlying logic of dollar hegemony.

The Truth About the June Maturity Peak Is Seriously Overhyped

Claims that “$6 trillion in U.S. bonds will mature in June” need careful examination of the data.

According to official U.S. Treasury data, the amounts maturing from April to June are approximately $2.36 trillion, $1.64 trillion, and $1.20 trillion, respectively. The total for these three months is only about $5.20 trillion—far below the $6 trillion figure circulating in the market.

In reality, many people make a critical mistake—confusing the issuance plans for short-term Treasury bills with actual maturing amounts. U.S. debt issuance follows a principle: long-term bonds are issued according to a schedule, while short-term bills are used to manage temporary deficits. The Treasury plans the issuance of long-term notes and bonds three months in advance (in January, April, July, and November), and these plans are generally stable. Short-term bills, however, are tools to address immediate cash needs.

When monthly deficits spike unexpectedly, the Treasury quickly issues more short-term bills. Because these are short-term and highly liquid, even issuing just one-day Treasury bills can attract continuous inflows if the interest rate is slightly above market levels. It’s like printing an extra $50—its face value doesn’t suddenly drop to $49.50.

Thanks to this flexible short-term financing mechanism, the impact of large maturing amounts is much smaller than expected. However, this approach also has hidden risks: if deficits persist, the proportion of short-term bills will increase. This means future interest payments will become highly dependent on the Federal Reserve’s policy rates, rather than being locked in by long-term bonds. If the government decides to issue more long-term bonds to improve this structure, bond yields will rise—indeed, in October 2023, the issuance of long-term bonds pushed the 10-year Treasury yield above 5%.

Will Resolving the Debt Ceiling Trigger a Liquidity Crisis?

Some worry that once the debt ceiling is lifted, the government will issue大量 new bonds, potentially triggering a “liquidity crisis” and causing market crashes. Is this concern justified?

The U.S. Banking System’s Reserves Are Still Ample

The excess reserves in the U.S. banking system are currently around $700 billion, leaving several hundred billion dollars of buffer before a “cash crunch” occurs. Based on this indicator, the Treasury can still inject at least $700 billion into the banking system without triggering a crisis.

The Treasury Can Adjust Its Issuance Pace Flexibly

If demand for short-term bonds begins to decline, the Treasury can slow down issuance, gradually replenishing liquidity in the market. This proactive liquidity management can effectively prevent sudden market shocks.

The Federal Reserve Has Multiple Policy Tools as Backstops

The Fed has already begun slowing its balance sheet reduction and has introduced the Standing Repo Facility (SRF). This tool allows primary dealers to easily obtain funding from the Fed when needed, serving as a last resort for market liquidity.

Combining these factors, the risk of a liquidity crisis is actually quite limited.

What Truly Supports the Dollar’s Creditworthiness?

Finally, the key question is: under what circumstances would the dollar’s credibility truly deteriorate?

Historically and in risk assessments, U.S. debt remains the lowest default risk among global bonds. This isn’t because U.S. debt levels are low—indeed, U.S. debt has approached record highs. But high debt levels are not inherently worrying, because economic growth naturally accompanies increases in debt and money supply. Debt is essentially another form of money.

As long as U.S. debt is denominated in dollars and global markets maintain confidence in the dollar, the U.S. can continue to rely on the Fed’s bond purchases and overseas capital inflows to sustain this cycle. The question is: what determines whether this cycle can continue?

Economic Fundamentals Decide the Currency’s Credibility

The core reason the dollar remains strong is the U.S.’s leading position in technological innovation and relative political stability. If major events undermine this stability and threaten the U.S. economy’s collapse, the dollar would be forced to loosen monetary policy and depreciate.

The 2008 financial crisis provides a clear example. The U.S. responded by large-scale money printing, which led to a 25% appreciation of the euro against the dollar.

Credit Ratings Are Worth Monitoring

The U.S. has maintained a AAA rating for a long time, but due to the 2011 debt ceiling crisis and recent tariff policy uncertainties, its rating was downgraded to AA+. While still higher than Japan’s A+ rating, it’s below Germany’s AAA, reflecting concerns about U.S. political risks among international rating agencies.

Political Stability Directly Affects the Dollar’s Performance

The recent decline in the dollar index is ultimately due to increased political and economic uncertainties caused by Trump’s policies, which weakened investor confidence.

However, even considering these risks, it’s a stretch to conclude that U.S. government debt will default. The separation of powers remains intact, and authoritarian rule has not emerged. Under this institutional framework, it’s unlikely that the U.S. will experience a substantive default in the foreseeable decades.

Short-term fluctuations are normal in markets, but the long-term upward trend persists. For investors, distinguishing short-term noise from long-term signals is much more rational than being misled by sensational predictions.