The US Debt Crisis is Snowballing Towards $35 trillion: A Perfect Recipe for Disaster?
Let’s address the elephant in the room. The US Debt Crisis is real. It is a sheer economic issue that needs immediate attention. Most importantly, our financial experts found Joe Biden has no actual repayment strategy. It could devastate the national economy. Meanwhile, its effect on the global economy could also be devastating.
By the end of this FY, the US Debt Crisis could be more than 7%b of the national GDP. That equals to $1.19 trillion. And that’s no standard figure. What’s more alarming is that the figure is not only large. It is almost twice the GDP ratio of the following most potent economy.
But Joe Biden has other things to worry about, alongside the mammoth figure only. Firstly, US public debt is at its worst ever. In peacetime, it has never reached $34.62 trillion before. Meanwhile, there are no signs that it will recede soon.
Upon analysis, we will try to discuss some serious aspects of this inevitable US Debt Crisis’s impact. We will also explore if there is any way to get out of debt fast.
Key takeaways
- The US public debt is $34.62 trillion now. In peacetime it has never reached such a staggering limit before.
- The annual interest on the net US public debt is $1 trillion.
- The US National Debt is increasing by $1 trillion every 3 months. In a year it climbs by $3.6 trillion.
- The IMF has addressed that the US should urgently look into its towering financial burden,
- The IMF also projects that the US GDP ratio/debt would cross the 140% mark within the next 8 years.
Repercussions of the US Debt Crisis
The above stats are not merely figures. Some experts say that the US is entering an era of debt crisis. The Credit Reports reflect unscrupulous debt spending is one of the main causes behind the looming debt crisis. I don’t understand why the presidential candidates or parties don’t try to address the problem.
To understand the debt situation in the US response better, I tried some recent journals and interviewed some pioneering financial guides of the country. I realized there is no straightforward answer as to whether debt is a looming problem for the US.
However, readers should know that debt is not as impactful if it is in the nation’s currency. This is true in the case of the US Debt Crisis. Secondly, debts are not as risky if there is a strong demand for that country’s bond. It is also true when it comes to the US.
To understand the debt scene better, economists refer to the debt ratio and GDP ratio cited by the IMF. I found out that this metric does not make the US the worst sufferer. Other countries have higher debt or poorer GDP ratios. Some of these countries are Japan, Spain, Italy, etc.
What is the upper Limit?
Economists say there is no limit to determining that a nation is under a debt crisis. However, the scenarios have reversed since the Great Financial Crisis 2008 and the recent pandemic. Most global economists say that you are in a severe debt crisis when your debt is more than 100% of the GDP. It is also a sign that you need to improve your payment habits.
What do the interest rates say about the US Debt Crisis?
Economists say that interest rates have a significant role in determining if debt is an issue for an economy like the US. Let’s say the debt is fast-growing. However, the interest rate is not climbing as fast. I’ll consider that an ideal debt situation.
However, the situation is different in the US. The debt accumulation rate in the US is gradually stabilizing. However, the interest rate is climbing and seems sky-high. In the same vein, I also found a counter theory.
The economic radicals- Market Monetarists claimed that the US has nothing to worry about. Firstly, the country still has high government spending. Most importantly, the same is also generating and promoting growth. For example, last year, the US spent $444.8 billion on infrastructure growth and allocated $81.5 billion to the states.
Interestingly, the construction of nonbuilding infrastructure attracted a budget of 49 billion dollars last year. It involves power facilities, sewage, highway construction, conservation, etc. The US has also improved its pre-pandemic infrastructure growth rate by 1%. So, we can say that the growth is static and, in fact, incremental. Meanwhile, there are no visible debt reduction strategies too.
However, I argue here. Since 2001, the interest rates against debts are the highest now. When that happens, whatever you spend contributes directly or indirectly to inflation. So, there’s no chance that good government spending indicates sources of new revenue generation that can topple the debts.
The Real Problem
Regarding development and all, the US economy still seems relatively healthy. However, the real issue is the debt dynamics. The only silver lining is that the debt/GDP ratio is still acceptable or manageable. Yet, the numerator and denominator of the ratio are skeptically changing.
The growth rate has never been an issue in the US. That had its effect, and now the debt is not piling at the pace it was 5 years back. But that’s the only good thing about the US Debt Crisis.
On the flip side, most economists argue that the US won’t be able to keep up with the inflation rate. And in some years, slow growth would be a stark reality. At the same time, the debt is increasing, no doubt. You will see the US debt/GDP ratio rising faster than anywhere in the world.
Relation between GDP growth and interest rates
The interest rates are a tricky thing. From 2009 to 2022, the US had a time slot of low interest rates. Hence, the claws and spikes of the debt issue never seemed so apparent. To know better you can read what Nobel laureate Paul Krugman has to offer.
He says debt will eventually ward off when DP growth is higher than the interest rate. However, the scenario is just juxtaposed in the case of the US Debt Crisis. Hence, there are more chances that debt will snowball shortly.
In the current quarter, the nominal US GDP was 5.37%. However, the average interest rate on debt increased from 1.56% to 3.27%. As I write the article, the growth is still more than the interest rate.
Nevertheless, the difference between GDP growth and debt interest rate is bridging fast. Therefore, growth seems to trickle down. So, I suppose that the snowball phase is not very far.
What does the future hold?
Tiger is no obvious sign that the US Debt Crisis is melting. Most of the signs are ominous in reality. There are issues of chronic fiscal deficits.
The deficits may alone be the reason for the crumbling of the US economy. However, the growth and development seem constant. In the future, the same can be a source for better job creation and the generation of more wages. Another good thing is that the US debt is in its currency. So, the looming debt may not turn fatal anytime soon.
But the government and the congress must address the elephant in the room. Make voluntary short-term actions to balance off the debt. Then, go all out to overcome the debt!
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