U.S. Debt Crisis Reaches Critical Point
Title: America's Ballooning Debt Threatens Creditworthiness and Financial Security
The United States has been overspending for an extended period, and Donald Trump's colossal budget deficit is now posing a serious threat to its credibility and the stability of the global financial system. The President, through his deliberate actions, is undermining investor confidence in the nation's capacity to service its debts.
The discontent towards the U.S. government has been brewing for a while, evident in several instances. This time, however, the aggravators are creditors, who have revolted against the U.S. government by pulling back their long-standing trust in American state debt.
The yields on 30-year U.S. Treasury bonds have surged beyond five percent, marking a significant psychological barrier that the markets had not breached permanently in nearly two decades. Even the interest rates for 20-year U.S. bonds have broken the five percent mark. This selloff in the market for U.S. Treasury bonds is not yet a panic, but it signifies that investors are questioning whether they can continue lending to the U.S. government.
The watershed moment came following Moody's downgrade of the creditworthiness of U.S. state debt for the first time in modern history. The U.S. no longer holds the highest rating from any of the three major international rating agencies.
This loss of faith is a turning point for international financial markets. For years, U.S. Treasury bonds have served as the rock-solid foundation upon which the global monetary system rests. If confidence in U.S. creditworthiness wanes, the system could be compromised.
A permanent departure of international investors from U.S. Treasury bonds is now conceivable, along with the end of the dollar as the global leading and reserve currency. Analysts warn that even if domestic investors eventually strengthen their support for state bonds, the dollar will remain under pressure, as foreign buyers are increasingly abandoning their role as reliable bond buyers.
The U.S.'s debt mountain has caused market concern for some time, with talk of the "Bond Vigilantes," an informal group of investors monitoring government debt, now zeroing in on Trump. With a total debt of $36 trillion, the country is now carrying a debt equal to roughly 122 percent of its economic output.
This debt ratio is now as high as it was at the peak of World War II. The country is grappling with financial commitments as though it is in the midst of the greatest conflict in world history, even though it's at peace, its economy is growing, and it has minimal unemployment. The U.S. is already spending more money on interest than on its whole military or healthcare budget. By 2035, almost a third of tax revenues might be dedicated solely to debt servicing.
The debt spree started over twenty years ago, with President George W. Bush's tax incentives, bank bailouts during the financial crisis under Barack Obama, the massive tax cuts for billionaires and the ultra-rich during Trump's initial term, and then the stimulus packages during the COVID-19 pandemic under Joe Biden, gradually driving the country's debt to unsustainable levels.
Now, Trump is exacerbating the situation further by extending his tax cuts for the rich, which will add over three trillion dollars to the deficit over the next decade. Analysts estimate that this will cause the budget deficit to grow to seven percent of GDP over the next 30 years. Currently, it stands over six percent annually.
Though Trump asserts this tax reform will generate more growth, thus offsetting the additional debt, this is unlikely to happen. "What we're seeing now is that there won't be any serious fiscal consolidation. The U.S. will run extremely high deficits for the foreseeable future... and in the next recession or crisis, these deficits will become even larger," a Wall Street Journal analyst assessed.
Other factors are making the fiscal crisis even more severe, including Trump's global trade war and rising inflation. There's no guarantee of comfort in this situation, warns Jamie Dimon, CEO of JPMorgan. The markets' warning shot serves as an economic reality check for Trump and his administration. Even before the election, it was suggested that only the impending collapse of the U.S. debt mountain might prevent him from implementing all his plans. This situation is now within reach.
Donald Trump considers the Greenback overvalued due to its status as the world's reserve currency, making U.S. exports more expensive compared to those from China, thus uncompetitive. He believes that weakening the dollar can reverse this trend and bring jobs back from China.
The debt mountain, now precariously balanced, could derail Trump's ambitions. Confidence in U.S. fiscal policy could trigger a rise in global borrowing costs and market volatility, potentially destabilizing both emerging and developed economies, especially those reliant on U.S. financial markets for liquidity and investment. A loss of faith in U.S. fiscal policy poses grave implications for both the U.S.'s economic stability and the global financial system.
Creditors' loss of faith in the U.S. government's creditworthiness, caused by escalating debt levels, has implications for not only America's economic stability but also the global financial system. The increasing national debt, exacerbated by policies such as tax cuts for the rich and the ongoing trade war, may lead to higher global borrowing costs, market volatility, and potential economic instability in emerging and developed economies.
The ongoing debates about the U.S. debt, including Donald Trump's assertions about the overvalued dollar and his plans to weaken it, are closely tied to issues of employment policy, finance, business, politics, general-news, and community policy, given the significant impact of these factors on the nation's financial security.
