US politicians appear to have steered the world’s largest economy into uncharted territory as it now faces a variety of challenges, including persistently elevated inflation at a 40-year high, a faltering economy that was hit by a technical in the second quarter of this year recession and a soaring national debt, topping $31 trillion on October 4th – a ticking time bomb for America and the world.
For the first time in history, the outstanding national debt of the US has surpassed $31 trillion, data from the country’s Treasury Department showed. In the last eight months alone, $1 trillion in debt has been raised and it is on the verge of reaching the $31.4 trillion debt ceiling that the US Congress has set for the Biden administration to borrow through early 2023 .
Since Barack Obama took office in January 2009, total US borrowing has continued to gallop, with the current level of $31 trillion nearly tripling the $10.6 trillion of debt in early 2009. When Donald Trump came to the White House in early 2017, he inherited $19.9 trillion in debt. And when Biden took office in January 2021, the national debt was $27.8 trillion. According to estimates by some American institutions, the US national debt is widely expected to reach at least $50 trillion by 2030.
Like Japan, the US is increasingly becoming a highly indebted economy, with public debt now accounting for about 140 percent of last year’s GDP. Whether the US faces “two lost decades” of anemic Japanese-style economic growth is yet to be seen, but an incessantly bulging national debt will definitely continue to pose problems for US policymakers while also undermining the US dollar’s status as a global reserve currency. because a weakening US economy will inevitably reduce the importance of the greenback.
To make matters worse, with inflation still above 8 percent, the Federal Reserve has pledged to raise interest rates further in the coming months to curb stubborn inflation. Higher interest rates mean the US government has to pay more for its massive borrowing, raising questions about Washington’s ability to service its debt, including its most important and ever-growing interest rate.
When US Treasury interest rates rise, the federal government’s borrowing costs also rise. The US has been able to borrow cheaply to respond to the COVID-19 pandemic as interest rates have been at historically low levels in 2020. Now interest rates on 20-year US Treasuries have risen to around 4 percent, meaning the US government will have to pay about $100 billion in additional interest costs this year as the US Federal Reserve is now charging interest rates from zero to 3 to 3.25 percent. In May, the Congressional Budget Office (CBO) forecast that US annual interest costs will reach $399 billion this year, which is expected to increase to $1.2 trillion by 2032.
The long-term fiscal challenges facing the US are mounting. Since the 2008-09 global financial crisis, the US government has relied on quantitative easing (QE) monetary policy to sustain relatively rapid economic growth while maintaining generous spending on the military, medical care and other social welfare projects. However, the structural imbalance between spending and revenue that existed prior to the pandemic has worsened, causing America’s national debt to accumulate rapidly.
If the US national debt tops $50 trillion while its GDP struggles at around $25 trillion, then the world’s largest economy is really going to be in deep trouble. US GDP is estimated to be flat this year compared to last year. It could decline in 2023 and 2024 as the Fed’s higher interest rates feed in, while Trump’s tariff war and Biden’s semiconductor dispute with China will further cloud the US economic outlook.
And in the coming months, there will be fiercer and uglier partisan fighting in Washington for congressional funds as the federal government is forced by lawmakers and the American public to borrow more to fund defense, infrastructure, education, medical care, pensions, and others initiatives. For many years, US Presidents, both Republican and Democratic parties, have avoided making tough decisions about the budget and failed to put it on a sustainable path.
With a skyrocketing national debt and a struggling economy, US policymakers will find that the dollar’s global reserve currency will erode as the country’s growing budget deficits will naturally raise concerns about Washington’s ability to repay the debt. If the US government continues to sell more Treasuries or even dump printed money into American households and businesses, investors will be cautious and avoid buying the bonds. In recent years, more and more central banks have started to reduce their holdings of US dollar-denominated assets.
Once their confidence in buying U.S. Treasuries is eroded, or if the U.S. government further consolidates its policies to someday cause a fiscal default, more foreign countries will join the rush to de-dollarize by seizing U.S. assets repel.
Can the Biden administration stop the US national debt from rising? The chances are very slim. In 2021 and 2022, the US debt has increased by more than $3.2 trillion under Biden’s watch. The debt count is expected to rise to $35 trillion when Biden ends his current term in January 2025. As a result, the country’s financial viability is under closer scrutiny from investors at home and abroad.
Source: Global Times
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