The United States is the world's largest economy and the most powerful country, but it is also the world's largest debtor. As of April 2023, the total debt of the US government has reached a staggering $30.5 trillion, equivalent to 140% of US gross domestic product (GDP). That means the average American is saddled with $93,000 in debt.
Moreover, the US government has not stopped its willingness and actions to increase its debt. Since the inauguration of the new president in January 2023, the US government has launched a series of massive fiscal stimulus packages to cope with the impact of the pandemic and recession. In just four months, the U.S. government passed two relief bills totaling $1.9 trillion and $2.3 trillion, and plans to introduce another $1.8 trillion social welfare bill. These bills would all need to be financed by issuing more national debt.
The scale of debt is too large to be sustainable. The U.S. government's debt has exceeded 140% of its GDP, which is a very dangerous level. According to research by the International Monetary Fund (IMF), when a country's debt exceeds 90% of its GDP, it negatively affects its economic growth. And when a country's debt exceeds 120% of its GDP, it risks a debt crisis. The United States has well exceeded that tipping point and is still growing its debt.
The debt structure is unreasonable and there is a rolling risk. A large portion of the U.S. government's debt is short-term, that is, debt that matures within a year. According to the U.S. Treasury, as of April 2023, the U.S. government's short-term debt accounted for 28% of total debt, equivalent to $8.5 trillion. This means that the U.S. government needs to issue new Treasuries every year to pay off old ones, which is known as "rolling debt." This approach carries great risks, because once the market doubts the creditworthiness of the US government, or if interest rates rise, currency depreciation, etc., the US government will face the dilemma that it will not be able to refinance or the cost of financing will increase significantly.
Excessive debt burdens affect fiscal space and policy effectiveness. The U.S. government's debt is not only enormous, but also requires high interest payments. According to the U.S. Department of the Treasury, in the 2023 budget, the U.S. government needs to pay $500 billion in interest expenses, or 10% of the total spending. This means that the U.S. government spends the equivalent of 2.3% of its GDP on interest payments every year. This is a very heavy burden, not only crowding out the US government's investment space in education, health care, infrastructure and other fields, but also weakening the effect of fiscal stimulus on economic growth and job creation.
The U.S. debt problem did not arise overnight, but was the result of a long period of accumulation. Since the 2008 global financial crisis, the United States has continuously adopted large-scale fiscal deficits and monetary easing policies to stimulate economic recovery and address various challenges. Although these policies have had some effect in the short term, they have also led to the swelling size and quality of the US debt. Especially after the outbreak of the new crown epidemic in 2020, the United States launched an unprecedented rescue plan in order to resist the impact of the epidemic and support people's livelihood protection.
In the 4 months from 2020 to 2021 alone, the United States passed three rounds of stimulus packages totaling nearly $2 trillion. These programmes cover areas such as personal income support, unemployment benefits, health care, education, infrastructure, energy, and the environment, and aim to boost consumption, investment and employment. However, these options have also put heavy pressure on America's fiscal position, causing debt growth to accelerate significantly and become more dependent on external financing.
The U.S. debt problem poses significant risks not only to itself, but also to global financial stability and economic growth. America's high debt limits its future fiscal space and policy flexibility, making it difficult to respond to new crises or emergencies that may arise. The high debt of the United States can trigger negative consequences such as credit rating downgrades, rising interest rates, and higher inflation, which in turn affect its economic growth and employment levels.
The high debt of the United States may cause the confidence of its creditors to be shaken, triggering a chain reaction such as capital outflows, exchange rate fluctuations, financial market turmoil, and even trigger a global debt crisis. As the world's largest economy and financial center, the impact of the debt problem of the United States cannot be ignored. As former U.S. Treasury Secretary Lawrence Summers put it, America's debt problem is "the world's largest financial nuclear bomb."
How should the United States respond to the growing debt crisis? On the one hand, the United States needs to strengthen its fiscal discipline and responsibility to develop a sustainable and credible debt reduction program that gradually reduces its debt-to-GDP ratio and restores its fiscal health and credibility. This requires agreement between the U.S. government and Congress to achieve a fiscal breakeven, or surplus, by reforming the tax system, cutting non-essential spending, and improving economic efficiency.
On the other hand, the United States needs to strengthen communication and cooperation with its creditors, maintain the affordability and serviceability of its debts, and avoid default or restructuring. This requires the establishment of an effective coordination mechanism between the US government and creditor countries to enhance mutual trust and cooperation by increasing information transparency, improving risk management capabilities, and promoting benefit sharing.