Rising American Debt Causes Apprehension in International Finances
The escalating US national debt, which has nearly doubled from $18.2 trillion in 2015 to its current $36.6 trillion, is causing growing concern among international capital markets and economists. This debt burden, combined with large deficits and recent fiscal policies, has led some experts to warn of a potential debt crisis within the next four to five years[1].
Leading figures in the finance industry, such as Ken Rogoff, a Harvard professor and former IMF chief economist, have expressed that this combination sets the stage for a crisis requiring significant economic adjustment[1]. The potential consequences of such a crisis are far-reaching and potentially devastating.
Economic instability could be the result, with a debt crisis resembling a constriction of debt-financed spending that severely harms the economy[1]. Inflation and currency depreciation are also potential outcomes, as demand for US Treasury bonds weakens, potentially forcing the Federal Reserve to print more money to buy debt and keep the government funded[1]. This could lead to rising inflation and a reduction in the US dollar's value.
High debt servicing costs, projected to reach $1.3 trillion in 2025, place an increasing burden on the federal budget, potentially crowding out other spending priorities[2]. Reducing the budget deficit to around 3% of GDP could lower interest rates by about 150 basis points, which would ease debt servicing costs and stimulate growth[1].
Investor confidence and market stability are also at risk. If investors lose faith that the US government can manage its debt responsibly, this could trigger sudden market turmoil. The US debt-to-GDP ratio is projected to rise sharply, possibly reaching 143% within a decade or much higher over longer terms[3]. This heightens risk perceptions and could lead to a loss of investor trust.
Long-term fiscal sustainability is another concern. The Congressional Budget Office and other analysts warn that continuing on the current trajectory, including permanent tax cuts and increasing deficits, could double the debt burden relative to GDP in several decades, escalating the risk of a fiscal crisis[3][4].
Examples of firms expressing concern over the US debt include Goldman Sachs, DWS, Unicredit, and KfW. Dirk Schumacher, KfW's chief economist, has stated that the debt mountain of the USA will continue to grow rapidly due to the "One Big Beautiful Bill"[2]. Thomas Schüßler, a well-known DWS fund manager, sees waning trust in the US due to high long-term US government bond yields, a depreciated dollar, and a sharply increased gold price[2].
Some experts, such as Niall Ferguson, a historian at Harvard, argue that history is full of examples of superpowers that spent more on debt service than on defense and subsequently weakened[1]. Ferguson has formulated "Ferguson's Law," stating that great powers that spend more on interest payments than on the military are doomed to decline[1]. According to Ferguson, interest payments could soon overtake the US military budget[1].
Prominent economist Kenneth Rogoff expects a debt-induced US inflation crisis with an inflation rate of 20 to 25 percent in the next five to seven years[1]. This inflation crisis could have serious implications for both the US and global economies.
However, not all experts share this pessimistic outlook. Nicholas Gartside, chief investment officer of Munich Re, views US debt as a safe haven and does not express concern about the ability or willingness of the US Treasury to repay the debt[5].
In summary, the escalating US debt poses a significant risk to economic stability worldwide. Addressing this challenge would require disciplined fiscal policy reforms to reduce deficits and stabilize debt growth.
Sources: [1] ntv.de [2] dpa, Carsten Hoefer [3] Congressional Budget Office [4] Various analysts [5] Unspecified source
- Several economists, including Ken Rogoff and Niall Ferguson, have warned that the increasing US national debt could trigger a debt crisis within the next few years, potentially leading to economic instability, inflation, currency depreciation, and a rising debt servicing burden.
- Policy changes, such as reducing the budget deficit and addressing long-term fiscal sustainability, are essential to avoid a potential debt-induced inflation crisis predicted by economists like Kenneth Rogoff, who forecasts an inflation rate of 20 to 25 percent in the next five to seven years.
- Investor confidence relies on the perceived responsible management of the US debt. Consequently, if the US government fails to address the growing debt burden, it could lead to a loss of investor trust, market turmoil, and an increased US debt-to-GDP ratio, as warned by analysts and firms like Goldman Sachs, DWS, Unicredit, and KfW.
