Why the US economy is ringing alarm bells

As the United States commemorates its 250th birthday, alarm bells are ringing over its burgeoning national debt, which recently crossed the $40tn mark. This milestone, surpassed in the span of just a few decades, has sent shockwaves both domestically and internationally, reflecting the mounting fiscal concerns. The debt, which has doubled since the start of former President Donald Trump's first term in 2016, has surged by approximately $90,000 every second or $7.8bn daily.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, underscores that President Reagan warned of this debt warning when the US reached $1tn in 1981. Now, almost 200 years later, the US is spending over $40tn just on interest payments for its debt. Major contributors to this debt include public spending during the Trump and Joe Biden administrations, outpaced by revenues, which have been undermined by tax cuts.

The situation worsens with inflationary pressures driving up interest rates, making the debt more expensive to service. At the beginning of Trump's presidency, the national debt was just under $20tn, but it has since ballooned to almost double that amount in a decade. The bond market is demanding higher returns due to the scale of US government borrowing and the competition from tech firms spending heavily on artificial intelligence.

Economists caution that while the United States' position as the world's largest economy and the dollar's status as the reserve currency provide some cushion, the debt ceiling looms at $41.1tn, with projections suggesting it could reach $64tn by 2036. Despite this, some experts argue it's still not a critical situation, describing it as a "flashing yellow light," not a "flashing red light." However, the looming specter of a possible financial market fallout remains a significant concern.