Why the US economy is ringing alarm bells

As the US commemorates its 250th anniversary, economic concerns have been mounting. The national debt reached $40tn this week, prompting alarm bells to sound. It took almost 200 years for the debt to first hit $1tn in 1981, a milestone that President Reagan deemed a warning sign. Currently, the US spends more than $40tn annually just on interest payments related to its debt.

The debt surge under both Trump and Biden administrations has outpaced revenue growth, which has been hindered by tax cuts. Major public spending programs and other expenses have strained the fiscal situation further. In response to crises such as the 2008 financial crisis and the COVID-19 pandemic, borrowing has increased significantly.

In 2016, during Trump's first term, the national debt was just below $20tn, having doubled over the past decade. The rate at which the debt is growing now stands at $7.8bn per day. Interest rates in the US are at multi-decade highs, driven by concerns about inflation and government borrowing. As a result, investors demand higher returns, and tech companies are competing with the government for capital.

The looming debt ceiling of $41.1tn by 2036, as forecast by the Congressional Budget Office, does not yet signal a critical situation. However, economists caution that the US still has a flashing yellow light. While the US enjoys the world's largest economy and a dominant reserve currency, investor appetite for lending is waning. This creates a vicious cycle, forcing the government to offer higher returns to attract investment.

The impact of these rising borrowing costs is felt both domestically and internationally. Households may face higher rates for mortgages, car loans, and credit cards, disproportionately affecting lower-income individuals. Additionally, higher borrowing costs for businesses can lead to increased prices, burdening consumers as well.

To manage the situation, the US Treasury has temporarily purchased government debt to boost demand and lower interest rates. However, these measures are proving short-lived, as borrowing costs have rebounded shortly after. With mid-term elections approaching, the administration is keen to demonstrate economic progress. However, without substantial growth, addressing the deficit may require measures like tax reform, public spending adjustments, or even debt restructuring. So far, the government's approach has been primarily focused on financial engineering.