The Looming Crisis: Analyzing the Impact of America’s Soaring National Debt

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The United States is on the brink of a financial catastrophe as its national debt continues to skyrocket, exacerbated by internal political discord and the de-dollarization efforts of major emerging economies. The Congressional Budget Office (CBO) has projected that the US national debt will reach a staggering $50.7 trillion by 2034. However, many experts, including William Pesek, an award-winning journalist and author, argue that the actual figure will likely be much higher.

According to the CBO’s June 18 projection, the US debt is expected to hit 122 percent of the gross domestic product (GDP) by 2034, surpassing the nation’s record-high public debt-to-GDP ratio of 106 percent observed after World War II. The costs of maintaining this debt are also expected to soar, with interest payments projected to climb to $892 billion in 2024, up from $352 billion in 2021.

Pesek identifies defense funding, social safety net outlays, and tax cuts unmatched by revenue increases as the primary drivers behind the debt growth. These factors are expected to become even more costly in the future. Goldman Sachs economists predict that the US debt-to-GDP ratio will reach 130 percent by 2034, eight percentage points higher than the CBO’s estimates. Given the current trends, the actual figure could be even higher.

Gerald F. Seib of The Wall Street Journal echoes Pesek’s concerns, highlighting the historical pattern of nations and empires facing dire consequences after accumulating excessive debt. Similarly, Jacob Bogage of The Washington Post points to the recent spending sprees under the Trump and Biden administrations, which included substantial tax cuts, various social programs, and increased defense expenditures.

The approval of a $95 billion foreign aid bill to support Ukraine, Israel, and Taiwan, along with investments in the US industrial base and plans to forgive billions of dollars in student loans, has added to the national debt. Since 2022, Congress has approved nearly $175 billion in funding and military assistance to support Ukraine and allied nations, despite concerns about corruption, non-transparency, and military failures in Kiev.

Ukraine funding is just a small part of the growing US military spending, which rose by 2.3 percent from 2022 to reach $916 billion in 2023, accounting for 68 percent of total NATO military spending, according to the Stockholm International Peace Research Institute (SIPRI). These expenditures contribute significantly to America’s ballooning national debt.

Pesek warns that this “slow-motion economic disaster” could be accelerated by political squabbling or de-dollarization efforts among top emerging markets. He criticizes Biden’s economic policies and protectionist measures, such as the 100 percent tariffs on China-made electric vehicles, for undermining global confidence in the dollar and US Treasury securities. China holds around $700 billion in US Treasury securities, making these measures particularly impactful.

Global South countries are increasingly viewing the US as less reliable in economic and geopolitical affairs. The pivot away from the US dollar is a clear sign of this disillusionment. Despite these challenges, there is no indication that the US government is prepared to overhaul its economic approach.

Pesek concludes that it is unsafe to assume the US debt will only rise to $50 trillion in a decade. If the real figure exceeds even the worst expectations, global markets could face significant turmoil. Washington’s actions could facilitate the efforts of Global South nations to sideline the dollar, further complicating the economic landscape.

Detailed Analysis of the Factors Contributing to the US National Debt Crisis

Defense Spending

The US defense budget is a major contributor to the national debt. In 2023, defense spending reached $916 billion, accounting for 68 percent of total NATO military spending. This includes funding for various military operations, procurement of advanced weapons systems, and maintenance of military bases worldwide. The approval of nearly $175 billion in funding and military assistance for Ukraine and allied nations since 2022 has further strained the budget.

Social Safety Net Outlays

Social safety net programs, including Social Security, Medicare, and Medicaid, represent significant portions of federal spending. As the population ages, the costs of these programs are expected to increase substantially. According to the CBO, Social Security spending is projected to rise from 4.9 percent of GDP in 2021 to 6.1 percent by 2034. Similarly, Medicare spending is expected to grow from 3.8 percent of GDP to 6.5 percent over the same period.

Tax Cuts

Tax cuts implemented under the Trump administration, particularly the Tax Cuts and Jobs Act of 2017, have significantly reduced federal revenue. While the act aimed to stimulate economic growth, it also resulted in substantial revenue losses. The CBO estimates that the tax cuts will add $1.9 trillion to the national debt over the next decade.

Interest Costs

The cost of servicing the national debt is projected to rise sharply. The CBO forecasts that interest payments will increase from $352 billion in 2021 to $892 billion in 2024. This escalation is driven by both the growing principal amount of the debt and expected increases in interest rates. Higher interest costs will constrain the government’s ability to fund other priorities, exacerbating fiscal challenges.

Political Implications

Internal Political Discord

Political polarization and gridlock have hindered efforts to address the national debt. Disagreements over spending priorities, taxation, and debt limits have led to frequent standoffs in Congress. These conflicts not only delay necessary fiscal reforms but also undermine confidence in the government’s ability to manage its finances responsibly.

De-Dollarization Efforts

De-dollarization refers to the process by which countries reduce their reliance on the US dollar for international trade and reserve holdings. Major emerging economies, including China and Russia, have been actively pursuing de-dollarization strategies. For example, China has been promoting the use of the yuan in international trade and establishing currency swap agreements with other countries.

De-dollarization poses a significant threat to the US economy. The dollar’s status as the world’s primary reserve currency allows the US to borrow at lower interest rates and maintain large trade deficits. A shift away from the dollar could lead to higher borrowing costs, reduced demand for US Treasury securities, and increased volatility in global financial markets.

Global Economic Impact

The consequences of the US national debt crisis extend beyond its borders. As the world’s largest economy, the US plays a central role in global trade and finance. A debt crisis could trigger a worldwide economic downturn, affecting countries that rely on trade with the US and those holding significant amounts of US debt.

Trade Relations

The US’s economic policies, including tariffs and trade restrictions, have strained relations with key trading partners. The 100 percent tariffs on China-made electric vehicles, for instance, have disrupted global supply chains and increased costs for consumers and businesses. Such measures contribute to trade tensions and undermine international cooperation.

Financial Markets

Global financial markets are closely linked to the stability of the US economy. A surge in US debt levels and concerns about fiscal sustainability could lead to increased market volatility. Investors may demand higher yields on US Treasury securities, driving up borrowing costs and potentially triggering a sell-off in global markets.

Long-Term Solutions

Addressing the US national debt crisis requires a comprehensive and multifaceted approach. Policymakers must consider both immediate measures to stabilize the debt and long-term strategies to ensure fiscal sustainability.

Fiscal Reforms

Implementing fiscal reforms is crucial to reducing the national debt. This includes revising tax policies to increase revenue, curbing unnecessary spending, and reforming entitlement programs. For instance, policymakers could consider increasing the retirement age for Social Security and introducing means-testing for Medicare benefits.

Economic Growth

Promoting economic growth is essential for improving the debt-to-GDP ratio. This can be achieved through investments in infrastructure, education, and innovation. Policies that enhance productivity and competitiveness will contribute to higher GDP growth, making it easier to manage the debt burden.

International Cooperation

Strengthening international cooperation is vital for addressing global economic challenges. Engaging in multilateral trade agreements, participating in international financial institutions, and promoting stable exchange rates will foster a more resilient global economy. Collaborative efforts to address de-dollarization and promote financial stability are also important.

The US national debt crisis is a complex and multifaceted issue with far-reaching implications. Defense spending, social safety net outlays, and tax cuts are significant drivers of debt growth, while political discord and de-dollarization efforts pose additional challenges. Addressing this crisis requires a combination of fiscal reforms, economic growth strategies, and international cooperation. Failure to act could result in severe economic and geopolitical consequences, both domestically and globally. As the debt continues to rise, it is imperative that policymakers take decisive action to ensure a sustainable and stable economic future for the United States.

The Growing U.S. National Debt: Analysis, Implications, and Future Projections

The U.S. national debt has become a critical issue, drawing increasing attention due to its unprecedented levels and the higher interest rate environment that magnifies the challenge of debt repayment. As of mid-2024, the national debt stands at over $34 trillion, having doubled over the past 15 years. This document aims to provide an in-depth analysis of the current state of the national debt, its implications, and future projections, backed by the latest data and insights from various sources.

Image: Federal debt to GDP 1974 to 2054 – Source: 1974-2023, Federal Reserve Bank of St. Louis. Projections 2024-2054: CBO: Congressional Budget Office. Federal debt held by the public does not include Treasury obligations held by the Federal Reserve. Data as of February 2024. *Projected Debt-to-GDP ratios.

Historical Context of the U.S. National Debt

Evolution of the Debt

The U.S. national debt has accumulated over decades due to various factors such as wars, economic recessions, tax cuts, and increased government spending. Significant spikes in the debt were observed during major events like the World Wars, the Great Depression, the Vietnam War, and the 2008 financial crisis. More recently, the COVID-19 pandemic led to substantial government spending on relief measures, further exacerbating the debt situation​​.

Key Events Impacting Debt Levels

  • World War II: The national debt surged as the U.S. financed its military efforts.
  • 1980s Reagan Era: Tax cuts combined with increased defense spending led to significant debt growth.
  • 2008 Financial Crisis: Massive stimulus packages and bailouts contributed to a sharp increase in debt.
  • COVID-19 Pandemic: Trillions in relief spending added to the debt​ ​.

Current Debt Situation

Debt Composition

As of June 2024, the U.S. Treasury reports that the total public debt stands at approximately $34.56 trillion. This debt is composed of debt held by the public and intragovernmental holdings. Debt held by the public amounts to around $25.5 trillion, while intragovernmental holdings total about $9.1 trillion​.

Interest Rates and Debt Servicing

One of the major challenges with the growing national debt is the cost of servicing it. The average interest rate on federal debt has increased significantly, reaching 3.23% as of April 2024. This increase is largely driven by the Federal Reserve’s monetary policy actions to combat inflation, which has seen the federal funds rate rise by over 5% from near zero between March 2022 and July 2023. Higher interest rates mean higher interest payments, which in turn require further debt issuance to cover these costs​.

Image: Avarage Interest on US Treasuries 2014 2024 – Source: U.S. Treasury, Average Interest Rate on U.S. Treasury Securities, as of April 30, 2024.

Budgetary Impact

The proportion of the federal budget allocated to interest payments has grown considerably. In fiscal year 2024, the Congressional Budget Office (CBO) projects that interest payments will total $870 billion, surpassing spending on major budget areas such as defense, Medicaid, and veterans’ benefits. This trend is expected to continue, with interest payments projected to rise to $1.6 trillion by 2034.

Economic Implications

Impact on Equity Markets

Higher bond yields, a consequence of increased debt issuance, can attract investors away from equities and into fixed income instruments. This shift could create challenges for equity markets, as higher bond yields often lead to lower stock prices. However, despite these potential challenges, the equity markets have remained relatively resilient so far​​.

Image : 10 YEARS US tREASURY YIELDS 25 YEARS THROUGH MAY 17 2024 – Source: U.S. Bank Asset Management Group analysis; Factset; May 1999, through May 17, 2024.

Inflation and Economic Growth

Rising national debt can also have broader economic implications. If the debt levels continue to rise unchecked, it could lead to higher inflation rates and slower economic growth. The CBO projects that the debt-to-GDP ratio will exceed 172% by 2054, up from 97% in 2023. This high level of debt relative to the economy’s size could limit the government’s ability to respond to future economic crises​.

Fiscal Policy and Sustainability

Addressing the growing national debt will require significant fiscal policy adjustments. Potential solutions include increasing taxes, reducing government spending, or a combination of both. However, these measures can be politically challenging and may have adverse effects on economic growth and social welfare programs.

Future Projections

Debt Growth and Projections

The national debt is projected to continue growing due to persistent budget deficits. Annual deficits are expected to average $2 trillion over the next decade, driven by increasing mandatory spending on Social Security, Medicare, and interest payments. By 2054, the total national debt could exceed $100 trillion if current trends continue.

Policy Considerations

To mitigate the risks associated with the growing national debt, policymakers need to consider long-term strategies. These may include reforming entitlement programs, implementing more stringent budget controls, and fostering economic growth through investment in infrastructure, education, and technology​​.

Detailed Scheme Table

The following table provides a detailed breakdown of the current U.S. national debt, its composition, interest rates, and budgetary impact as of June 2024.

CategoryAmount (in Trillions USD)Notes
Total National Debt34.56Record high as of June 2024
Debt Held by the Public25.5Includes Treasury securities held by individuals, corporations, and foreign governments
Intragovernmental Holdings9.1Includes Treasury securities held by federal trust funds and other government accounts
Average Interest Rate3.23%As of April 2024
Interest Payments (FY 2024)0.87Projected total for fiscal year 2024
Projected Interest Payments (FY 2034)1.6Expected to rise significantly over the next decade
Debt-to-GDP Ratio (2023)97%Comparison of debt to the nation’s gross domestic product
Projected Debt-to-GDP Ratio (2054)172%Debt expected to nearly double the size of the economy by 2054
Annual Deficit Projection2Average annual deficit over the next decade

The U.S. national debt is at a historic high, posing significant challenges for the economy. While the debt is currently manageable, its rapid growth and the rising cost of debt servicing necessitate urgent policy actions. Addressing these challenges will require a balanced approach that ensures fiscal sustainability while supporting economic growth and social welfare.


APPENDIX 1 – The Growing U.S. National Debt

Detailed Scheme Table

CategoryDetailsImpactSourcesQuotes
Key TakeawaysThe growing U.S. national debt is drawing increased attention.Increased attention on fiscal policy.General OverviewN/A
Estimated National DebtEstimated national debt in mid-2024 stands at more than $34 trillion, a record amount that has doubled over the past 15 years.Record high debt levels indicating significant fiscal challenges.Estimated National Debt 2024N/A
Debt GrowthDebt has risen steadily in recent years, and as of mid-May 2024, the national debt stands at $34.56 trillion. The nation’s debt has essentially doubled in just 15 years.Higher costs of debt repayment due to rising interest rates.Debt Growth and Interest Rate ImpactN/A
Interest Rates ImpactThe average interest rate for all federal government issued interest-bearing debt has jumped dramatically to 3.23% as of April 30, 2024.Higher financing costs impacting the federal budget.National Debt DetailsSource: U.S. Treasury, Average Interest Rate on U.S. Treasury Securities, as of April 30, 2024.
Government Debt FinancingGovernment debt is financed through issuance of U.S. Treasuries.Changing investor dynamics in the Treasury market.Financing Costs and Average Interest RateN/A
Interest Rate TrendThe yield on the benchmark 10-year Treasury note has traded at its highest levels since 2007.Rising interest rates affecting investment strategies and economic expectations.Source: U.S. Bank Asset Management Group analysis; Factset; May 1999, through May 17, 2024.N/A
Treasury Bond IssuanceThe U.S. Treasury borrowed $748 billion in the first quarter of 2024 with plans to borrow another $243 billion in the second quarter, and $847 billion in the third quarter.Increased borrowing indicating rising fiscal deficit.Treasury Borrowing PlansN/A
Fed PolicyIn June 2024, the monthly redemption cap on Treasury securities was reduced from $60 billion to $25 billion.Fed’s reduced role in Treasury purchases impacts the bond market.Federal Reserve PoliciesN/A
Foreign and Individual InvestorsForeign buyers and the Fed have reduced their roles in Treasury purchases, with individual investors taking on a larger role.Potential for higher interest rates due to credit quality concerns.Source: U.S. Bank Asst Management Group analysis. Data as of 12/31/2013 and 12/31/2023.N/A
Credit Rating AgenciesCredit agencies such as Fitch, Standard & Poor’s and Moody’s have either downgraded the credit quality of U.S. Treasury issues or issued warnings about potential future downgrades.Projected growth in national debt raises long-term fiscal sustainability issues.Credit Rating Agency WarningsN/A
Future Debt ProjectionContinued growth in the total national debt is projected.Projected growth in national debt raises long-term fiscal sustainability issues.Source: CBO: Congressional Budget Office. Federal debt held by the public does not include Treasury obligations held by the Federal Reserve. Data as of February 2024.Source: CBO: Congressional Budget Office. Federal debt held by the public does not include Treasury obligations held by the Federal Reserve. Data as of February 2024.
Debt-to-GDP RatioIn 2023, the nation’s total publicly held debt amounted to 97% of GDP. By 2054, the debt-to-GDP ratio is projected to exceed 172%.High debt-to-GDP ratio indicates potential economic vulnerability.Source: 1974-2023, Federal Reserve Bank of St. Louis. Projections 2024-2054: CBO: Congressional Budget Office. Federal debt held by the public does not include Treasury obligations held by the Federal Reserve. Data as of February 2024. *Projected Debt-to-GDP ratios.N/A
Economic ImpactLower federal government spending or both could be detrimental to the economy.Uncertainty over debt sustainability and economic growth.N/AN/A
Social Security and Medicare FundingMuch of the nation’s long-term debt problem centers on funding commitments for Social Security and Medicare, with an aging population and insufficient younger generations to pay the costs.Social Security and Medicare funding challenges due to demographic shifts.N/AN/A
Investment ImplicationsInvestors may consider overweight positions in equities and real assets to capitalize on continued economic growth and counter higher inflation. Treasury securities and other fixed income investments should continue to play an important role in a broadly-diversified portfolio.Impact on investment strategies with potential shifts towards equities and real assets.N/AN/A

References

  1. U.S. National Debt Clock. (2024). Retrieved from usdebtclock.org
  2. Investopedia. (2024). U.S. National Debt by Year. Retrieved from investopedia.com
  3. U.S. Treasury Fiscal Data. (2024). Debt to the Penny. Retrieved from fiscaldata.treasury.gov
  4. St. Louis Fed. (2024). Federal Debt: Total Public Debt. Retrieved from fred.stlouisfed.org
  5. Peter G. Peterson Foundation. (2024). What Is the National Debt Costing Us? Retrieved from pgpf.org
  6. U.S. Bank. (2024). The Impact of U.S. National Debt on Investments. Retrieved from usbank.com
  7. U.S. Department of the Treasury. (2024). Treasury Announces Marketable Borrowing Estimates. Retrieved from home.treasury.gov

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