The United States Government’s Looming Debt Crisis: Gradually and Suddenly

The gradual increase in public debt and the risk of sudden bankruptcy

The United States government is facing a perilous situation as its public debt has now surpassed $34 trillion, signaling a gradual descent into financial instability. Regardless of which political party is in power, the government has allowed the debt to increase year after year, without making significant efforts to cut spending or increase revenue. Now, as interest rates rise and foreign investors become hesitant to invest in US government bonds, the country is at risk of a sudden bankruptcy. The state of our public finances is not only alarming due to the high debt-to-GDP ratio but also because we continue to run large budget deficits. This article explores the implications of this growing debt crisis and the urgent need for a change in policy direction.

1: The Appalling State of Public Finances

The United States is not only approaching the debt-to-GDP ratio experienced at the end of World War II but also running large budget deficits. Despite low unemployment rates and the potential for budget surpluses, the deficit is close to 6% of GDP. The Congressional Budget Office warns that, based on current policies, the deficit will persist indefinitely. This dire situation calls for immediate action to address the unsustainable level of debt.

2: The Impact of Rising Interest Rates

Large deficits are manageable when the government can finance them at low interest rates. However, this scenario changes dramatically when the government has to roll over its maturing debt at higher interest rates. The increased cost of servicing the debt further exacerbates the deficit and puts the country on an upward spiral of debt. The recent increase in the 10-year Treasury bond rate from less than 1% to 4% underscores the risk of rising interest payments.

3: Strains on Public Finances

Several factors contribute to the strain on public finances. Fears of continued inflation may force the Federal Reserve to maintain higher interest rates. Additionally, foreign governments may reduce their holdings of US government bonds, especially if credit-rating agencies downgrade the country’s credit score. As a result, interest payments could become the fastest-growing government-budget spending item, reaching around 3 ¼% of GDP by 2030.

4: Avoiding Default but Facing Consequences

While the United States is unlikely to default on its debt, the reliance on printing more dollars to meet borrowing needs could lead to a dollar crisis and further inflation. It is crucial to find a better solution than relying on foreign creditors or printing more money. Getting spending under control is the ideal approach, but it remains uncertain whether Washington will make substantial progress in this regard.

Conclusion:

The United States government’s growing debt crisis poses a significant threat to the country’s financial stability. The gradual increase in public debt, coupled with the risk of sudden bankruptcy, demands immediate attention and a change in policy direction. Last year’s inflation surge, warnings from credit-rating agencies, and the reduction in foreign government holdings of US government bonds serve as clear signals of the dangerous path our public finances are on. It is imperative that Washington heeds this message and takes decisive action before it is too late. The future of the country’s economic well-being depends on it.