According to the US Treasury Department’s official website, America’s total outstanding debt held by the public crossed more than 100% of its GDP last week. Of its gross debt of $39.5 trillion, $31.8 trillion is held by the public, while intra-governmental holdings account for the rest.
Doubtless, some of the increase in debt can be traced to past crises: the 2008 financial crisis and covid disruption of the early 2020s, for instance. However, in the years since, thanks to persistent and growing budget deficits, the US government’s debt has grown by leaps and bounds, even as economic growth has held up.
The non-partisan US Government Accountability Office (GAO), often called America’s Congressional watchdog, has warned that “today’s deficits—if not addressed—could have lasting financial consequences.” In its assessment, “If nothing is done to reduce deficits each year... debt will grow about twice as fast as the economy over the next 10 years. In 30 years, that debt will likely be 2.5 times the size of the economy.”
That is bad news for the US and its citizens. As the GAO adds, rising debt will likely lead to higher borrowing costs, stagnant wages and more expensive goods and services as “businesses may invest less in technologies that make it easier and cheaper to produce goods and services.”
All this, despite the country’s “exorbitant privilege”—in the words of former French leader Valéry Giscard d’Estaing—of being able to borrow overseas in its own currency, thanks to the US dollar’s unique status as the world’s reserve currency.
Today, not only does the US run one of the largest budget deficits among rich countries, placed at 6% of GDP by the Congressional Budget Office for the fiscal year that ends in September, its yawning gap between spending and revenue widens each time it embarks on another military misadventure, such as the one in West Asia.
The White House wants to raise the US defence budget from $1 trillion to $1.5 trillion next year. Wide gaps in federal finances year after year mean even more Treasury bonds must be issued.
Since bond oversupply requires higher rates of interest to attract bond-holders, that risks raising the cost of capital across the economy, which in turn slows investment and growth.
Even though AI exuberance has kept investments going, the ill-effects of fiscal profligacy have begun to show up. The yield on 10-year US Treasury bills rose to nearly 4.6% on 15 July from 2.9% four years earlier.
Sure, policy rates and bond market conditions shape yields too, but gaping deficits play a starring role. Bonds originally issued at 1-2% must be refinanced at today’s rate, which pushes up annual interest costs and sets up a self-worsening debt spiral.
The GAO has urged a long-term strategy for fiscal stability, saying, “The longer we wait to do this, the more dramatic actions will need to be and the more painful the consequences for Americans.”
And for the rest of the world, we should add, given America’s financial heft. Slower growth in the world’s largest economy is bad for all economies around the globe, especially emerging ones that must earn dollars through exports to fund critical imports. Dearer credit in the US also raises rates elsewhere, affecting global growth adversely.
Unlike the old saying, ‘What happens in Vegas stays in Vegas,’ what happens in America doesn’t stay in America. It affects the rest of the world. For better or worse.