America’s mounting debt issue sends shockwaves to U.S. and global markets

The Marriner S. Eccles Federal Reserve Board building is seen in Washington, D.C., U.S. /CFP

The Marriner S. Eccles Federal Reserve Board building is seen in Washington, D.C., U.S. /CFP

Editor’s note: Gao Zhijun is an assistant research fellow at the Chinese Academy of Social Sciences. The article reflects the author’s opinions and not necessarily the views of CGTN.

On April 8, 2024, the U.S. debt level climbed to approximately $34.6 trillion (roughly $102,976.19 per capita). 

According to a recent report released by the U.S. Congressional Budget Office (CBO), the U.S. publicly held debt to GDP ratio is projected to surge from 97 percent in 2023 to 107 percent by the end of 2029, exceeding the historical peak just after World War II. 

CBO indicates that the debt-to-GDP ratio will continue accelerating onward and reach 116 percent in 2034 and 166 percent in 2054. 

The main drivers behind the outlay increases are social security, interest payments, large stimulus checks during the COVID-19 pandemic, and a series of massive investment packages signed under the Biden administration. 

Meanwhile, the 2017 Tax Cut and Jobs Act signed into law during Donald Trump’s first presidential term would reduce federal revenue by $1.8 trillion until 2027.

‘Unsustainable path’

CBO Director Phillip Swagel recently warned that the U.S. could suffer a market shock similar to what the UK experienced during former Prime Minister Liz Truss’ 44 days of premiership last fall. 

Although Swagel said the U.S. is “not there yet,” he said he was worried that if the national debt continues to rise, it will have outsized effects on interest rates which will in turn cause a dramatic impact on the fiscal trajectory. 

Bloomberg Economics ran one million simulations after taking various variables into account and 88 percent of the simulations showed that the debt-to-GDP ratio is on an “unsustainable path.”

Mounting debt and interest payments could ‘crowd out’ domestic public and private investment

As the national debt accumulates, the burden of interest payment could become increasingly unbearable. 

According to CBO, the net interest payments recorded $659 billion (or 2.4 percent of GDP) in fiscal year 2023, surging by 38 percent compared to 2022. 

The interest cost is projected to reach $1.2 trillion by 2032 and is likely to be the largest federal spending category within the next three decades. 

If the debt snowball continues to become larger, it will propel bond buyers to demand higher yields as compensation for the resulting increase in risks, leading to a vicious cycle of “debt-interest spiral.”

Another direct consequence of rising interest payments is that it will narrow the budgetary space for public investment in infrastructure, education and other productive programs. 

This could slow down economic growth in the long term. 

At the same time, higher interest rates will increase financing costs for enterprises, which would be forced to cut payrolls, reduce budget on research and development, and defer investment in new projects. 

This would lead to slower wage growth, fewer training opportunities and less business revenues, augmenting social divisions and even incurring political consequences.  

Pedestrians walk near the New York Stock Exchange in New York, U.S. March 19, 2024. /CFP

Pedestrians walk near the New York Stock Exchange in New York, U.S. March 19, 2024. /CFP

Emerging and low-income economies exposed to financial turbulence

If the U.S. debt continues its skyrocketing trend and becomes literally “unsustainable,” it will bring about severe repercussions in global markets. 

The debt dilemma could cause a diminishing of confidence in the U.S. dollar, pushing foreign investors to liquidate U.S. treasury bonds. 

This would lead to a depreciation of the U.S. dollar, reducing the price competitiveness of foreign exports to U.S. markets. 

In this case, the exporting countries may experience trade deficits with the U.S., worsening their current account imbalances.

In the context of a U.S. bond sell-off, large amounts of capital may target emerging and developing countries as new destinations. 

This sudden inflow of “hot money” could create credit booms and even asset bubbles in recipient countries. 

However, once the conditions in the U.S. renew, the potential capital reversals could lead to currency crises in those countries.

In the year of the U.S. presidential election, it is politically difficult for the Biden administration to either increase taxes or cut spending to mitigate the federal deficits. 

Hence, the debt issue is likely to deteriorate in the coming months, bringing ever-increasing instability to financial markets and beyond.