Can the US manage its escalating debt without triggering a fiscal crisis?

Currently, markets still trust the US's ability to manage its fiscal policies effectively
Currently, markets still trust the US's ability to manage its fiscal policies effectively Copyright Peter Morgan/Copyright 2024 The AP. All rights reserved.
Copyright Peter Morgan/Copyright 2024 The AP. All rights reserved.
By Piero Cingari
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The US is grappling with record $34.5 trillion debt, triple the eurozone's, and set to hit 134% of GDP by 2029. Elevated deficits and skyrocketing interest payments may evoke fears of imminent fiscal crisis if countermeasures are not adopted.


The American public debt is at the highest levels ever and is expected to progressively increase due to huge budget deficits that surpass the country's economic growth, generating fears of a potential fiscal crisis in the world's leading economy.

The US national debt has soared to a staggering $34.5 trillion (€32.3 trillion), nearly three times that of the entire eurozone, accounting for 122% of its gross domestic product (GDP) versus the eurozone's 87%. According to the latest International Monetary Fund (IMF)'s Fiscal Monitor report, this figure is projected to rise to 134% by 2029, indicating a worsening debt trajectory.

In 2023, the US government deficit increased to 8.8% of GDP from 4.1% in 2022, despite strong economic growth. A significant factor in the expanding deficit is the rising cost of interest payments due to the rising interest rates. The Congressional Budget Office foresees net interest expenses climbing to 3.2% of GDP, equivalent to $951 billion (€889 billion), by 2025.

Experts raise the alarm

"The US is running [a] very large deficit for a country with a strong demand, and they still have to deal with the last mile to bring inflation down," Gita Gopinath remarked in a recent Bloomberg interview.

Veteran Wall Street investor Ed Yardeni warns: "The federal deficit is getting bigger and bigger devouring more and more funds in the capital markets. It hasn't killed anyone yet but it might one day if investors decide they don't want to keep feeding it."

Similarly, billionaire investor Ray Dalio recently stressed the need to own "non-debt money", advocating for gold as a hedge against rising debt and inflation.

David Kelly, strategist at JP Morgan Asset Management, points out that achieving fiscal balance would require significant reductions in major expenditures such as Defence, Medicare, Medicaid, and Social Security, coupled with increased taxes - a move for which there seems to be little voter appetite.

In a recent interview with The Peterson Institute for International Economics and the Council on Foreign Relations, Christine Lagarde, President of the European Central Bank, highlighted that the US fiscal deficit is currently twice the size of the eurozone's.

The threat of rating downgrades and sticky inflation

As of April 2024, the US government's credit ratings are AA+ with a stable outlook from Standard & Poor's and Fitch Ratings, and Aaa with a negative outlook from Moody's.

The latter adjusted its outlook from stable to negative in November 2023 following a Fitch downgrade in August (from AAA to AA+), suggesting possible further downgrades over the next one or two years.

Fitch based the downgrade on "the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance that has manifested in repeated debt limit standoffs and last-minute resolutions".

Additionally, the IMF warns that persistent inflation, exacerbated by loose fiscal policies, could complicate efforts to manage inflation and pose heightened global financial risks due to spillover effects from higher US interest rates.

Potential for a 'Liz Truss moment'?

While episodes of sovereign bond tumult are more common in emerging markets, they have also occurred in advanced economies, as evidenced a decade ago in the euro area and more recently in the United Kingdom.

In September 2022, during Liz Truss's short tenure at Downing Street, a significant event unfolded in UK fiscal policy.

Liz Truss and her Chancellor of the Exchequer, Kwasi Kwarteng, unveiled a "mini-budget" that proposed extensive tax cuts without clear plans for funding.

These cuts included reductions in income tax rates and the controversial decision to abolish the highest rate of income tax for the wealthiest. This budget, intended to stimulate economic growth through a radically laissez-faire approach, met with severe market backlash.

The negative reaction was swift, causing a sharp decline in the value of the British pound and a significant spike in government borrowing costs. The fallout was so drastic that it prompted the Bank of England to intervene and stabilise the bond market to protect financial institutions.

Currently, markets still trust the US's ability to manage its fiscal policies effectively. However, trust is neither eternal nor unconditional even for a major economy. Once lost, it could lead to severe financial repercussions.

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