The US is heading towards a debt crisis.

How much debt does the US currently have?

The United States debt is expected to grow to a whopping $28.2 trillion this year. This corresponds to almost 100 percent of economic output. The increase in debt over the past few years has been dramatic. 100 days since June of last year, it has increased by a trillion, and by 2023, it was almost $100,000 more every second. The budget deficit now stands at seven percent of GDP, or the equivalent of $1.9 trillion, even though the US economy is growing. This means that the financial situation in the US is developing significantly worse than in the Eurozone or Great Britain (see chart).

What are the reasons for the debt explosion?

There are several reasons for the sharp increase in debt. Donald Trump In his first term in office, he paved the way for massive tax cuts, depriving the state of billions in revenue. fight against crown- The pandemic also cost huge sums of money and led to an increase in the national debt. But Joe Biden’s economic stimulus programs, such as the Chips and Science Act or the Deflation Act, are also straining government finances.

Clemens Schömann-Fink is a financial expert and the man behind it Youtube channel “René will Rendite”. In his FOCUS Online column, he highlights current topics related to the stock market and investing. Subscribe his newsletter here for additional financial information.

How will the debt develop in the future?

The outlook for US public finances is bleak. In its latest forecast, the Congressional Budget Office (an independent US budget agency) predicts that the debt will reach more than $50 trillion (122 percent of GDP) by 2034. The deficit would then be $2.8 trillion (6.9 percent of GDP).

Increasing interest costs are increasingly becoming a problem for government finances. CBO projects that interest payments will exceed $1 trillion, or 3.4 percent of GDP, for the first time in 2025. That’s more than the US spends on defense. In 2034, the US will have to spend 1.7 trillion euros on interest alone. That’s more than a fifth of projected revenue.

Another issue besides interest is social spending, particularly Social Security and Medicare spending. The US population is aging, and more people will benefit from important programs. CBO projects that Social Security spending will be about $2.5 trillion in 2034 (up from $1.4 trillion in 2023), and Medicare spending will be $1.7 trillion. This means doubling compared to 2023.

CBO’s estimates may even be too positive. Because experts always assume the current legal situation. For now, this stipulates that the tax cuts proposed by Trump will expire at the end of 2025. But I would be very surprised if Donald Trump, if he were re-elected, would actually abandon one of his most important projects from his first term in office.

But even under Joe Biden, if he wins the election, austerity won’t be on the agenda. He probably wouldn’t extend the tax cuts. But he will likely continue to increase government spending on the economy and social programs.

How dangerous is the situation?

With huge debt and high deficits, concerns about a US debt crisis are growing. Fear. there may soon be so many new government bonds that there won’t be enough buyers for them. This would force the US government to offer higher interest rates, which in turn exacerbates the debt problem. In addition, traditional buyers of US stocks such as China, have become more cautious. Beijing has been trying to diversify its currency reserves for some time and is increasingly investing in gold instead of buying US Treasuries. This trend can be observed in other countries as well.

Since US government bonds are considered the safest and most liquid asset class, it would be fatal for global financial markets if confidence in US creditworthiness were to disappear.

It is not possible to reliably predict when it will reach this point. It can be noticed that the importance of the dollar as a reserve currency is slowly decreasing. But it is also clear that the US has the strongest economy in the world, and the US Federal Reserve will not stand idly by and watch the country slide into a debt crisis. If necessary, the Fed can act as a buyer in the market. It will increase inflation, but will give the state some breathing room. “It depends on the credibility of the government and the Fed,” said economist Markus Brunermeier. “As long as this is the case and the economy is growing sufficiently, the US government can operate a kind of pyramid scheme, that is, partially finance the payments to its creditors by issuing new bonds.”

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