As the U.S. stock market hits new highs and economic data frequently shows resilience, the old topic of the debt ceiling looms over the global financial markets like a ghost. In recent months, the tug-of-war between the two parties in the U.S. Congress over the debt ceiling has played out once again: a compromise is highly likely, but the underlying structural contradictions and fiscal dilemmas have not been eradicated by a "temporary increase."

For those familiar with American politics, the debt ceiling issue is not new. From the "debt ceiling crisis" in 2011 that led to a rare downgrade of the U.S. sovereign rating by S&P, to subsequent threats of "technical defaults," the tug-of-war between the Democratic and Republican parties over fiscal spending and deficit size has almost become a part of the American political landscape.

The Biden administration hopes to maintain large fiscal expenditures to support employment, infrastructure, and green transformation, while the Republicans position themselves as fiscal conservatives, demanding cuts in spending in exchange for raising the debt ceiling. However, in practice, the final outcome is often a compromise: the debt ceiling is raised time and again, and the snowball of the U.S. fiscal deficit continues to grow.

From an investor's perspective, this "show" is predictable, but the risk that cannot be ignored is the potential for misjudgment during the game. The market is not worried about a real debt default, but rather about the unresolved political game potentially causing short-term market liquidity tensions, fluctuations in Treasury auctions, and even affecting credit ratings and global risk aversion sentiment.

What is more concerning is the structural problem of the U.S. fiscal deficit implied by the debt ceiling. In recent years, pandemic spending, energy transition, and external geopolitical competition have combined to increase the rigidity of U.S. fiscal spending; meanwhile, in a rising interest rate cycle, interest payments on Treasury bonds are also expanding. Although the Federal Reserve is striving for a "soft landing," in a high-interest environment, the Treasury needs to pay more interest on newly issued bonds, which further raises the deficit.

This means that the U.S. debt issue is no longer merely a "bargaining chip" for party checks and balances, but is being re-examined by global investors as a potential hidden danger to the stability of the U.S. financial system. When interest payments approach or even exceed certain core livelihood budgets, the "borrowing new to pay old" model will face a test.

Some liken this to an "invisible refinancing crisis": as long as global capital is still willing to foot the bill, and the dollar's status as a global reserve currency has not been replaced, the U.S.'s high-deficit model can continue. However, if faced with global de-dollarization, weak overseas buying, or accelerated geopolitical financial decoupling, this logical chain may face more pressure.

Although debt ceiling negotiations always end in compromise, the market will remain highly sensitive to fluctuations during this period. In recent weeks, U.S. Treasury yields have fluctuated upward, reflecting a hedge against the technical risks of short-term defaults. At the same time, safe-haven assets like gold and Bitcoin have also shown temporary strength, reflecting some investors' demand for hedging against policy uncertainty.

There is a deeper signal behind this: as the Federal Reserve's monetary policy shifts to a path of "higher rates maintained longer," if the fiscal side cannot converge simultaneously, the tension between Treasury supply pressure and market interest rates may further amplify. In other words, while the debt ceiling deadlock is a scene in a political theater, it reflects systemic contradictions in interest rates, liquidity, and fiscal sustainability.

Looking at the political timeline before the 2025 election, the debt ceiling issue will likely be used multiple times as a negotiating weapon. The Democrats hope to continue spending plans to strengthen voter support, while the Republicans leverage "fiscal discipline" as political capital. In the short term, both sides are likely to reach a compromise again, but in the long term, if the scale of U.S. debt does not slow its growth through structural reforms, while defaults may be far off, the "burden of repayment" will gradually erode the flexibility of federal finances.

It is worth mentioning that some state and local governments are also facing rising debt burdens in a high-interest environment, indirectly amplifying the rebalancing pressure on the federal government. For global investors, U.S. Treasuries remain an irreplaceable core safe-haven asset, but whether the credit premium will be repriced and whether interest payments will backfire on fiscal policy could become important variables affecting global liquidity.

The debt ceiling issue has never truly been far away; it acts like a mirror, reflecting the multiple intertwining of American political polarization, rigid fiscal spending, global capital flows, and monetary hegemony. Each "crisis" may seem like a farce, but behind it all, the market is reminded: nothing comes without cost.

For investors, the more realistic question is how to find certainty in this "predictable crisis": is it to avoid short-term liquidity risks? Is it to reassess the long-term allocation of dollar assets? Or is it to bet that dollar hegemony remains strong and U.S. Treasuries continue to be a safe haven for global capital? This multiple-choice question may be more worthy of attention than the debt ceiling numbers themselves.

Related: Bitcoin (BTC) holds steady at $109,000, bulls dominate: Is a new historical high expected today?

Original: “The U.S. Debt Ceiling Deadlock: A Triple Game of Politics, Fiscal Policy, and Markets”

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