The debt crisis could throw Trump’s plans off track (Pic: Reuters)
The federal government debt in the US is massive and is posing an increasing threat to the world economy.
That debt now stands at around 100 percent of US GDP—the total value of goods and services produced and sold annually.
This is higher than at any other time since the Second World War. The national debt has built up over years of budget deficits. The current budget deficit stands at over 6 percent of GDP.
This is unprecedented when the economy is not in recession but is actually growing—as it is now. This year the deficit is likely to be $1.9 trillion, with the interest payable on the total debt more than $1 trillion. That’s more than the current US military budget.
These huge deficits are the direct product of low profitability, low and no growth, the financial crisis of 2008 and the Covid-19 lockdown of 2020.
The government finances its debt by persuading investors to buy government bonds, known in the US as treasuries. Bonds pay interest, usually fixed at a specific level.
If the supply of bonds is very large and the demand for them relatively weak, they require a higher rate of interest to attract investors.
Treasuries are normally considered to be as safe as houses by rich individuals, corporations and governments.
They are a cornerstone of the world economy. The supply of and demand for US treasuries determine interest rates not just across the US economy, but across the world.
It is the security of US treasuries that has allowed the US government to run up such a huge debt and still attract investors. Even if things go a bit pear-shaped, investors are confident that the Federal Reserve—the US central bank—will step in to prop up the system.
However, there are limits. Investors fear that the debt is destined to carry on growing and will ultimately prove unsustainable.
And the debt crisis could throw Donald Trump’s plans off track. The president has, for example, cut taxes for the rich and wants to increase military spending by 50 percent.
Several factors show this growing fragility. First, there was the unprecedented intervention by the US treasury to support the value of the Japanese yen. The US bought up large quantities of yen in an attempt to push up its value.
The yen has been falling in value, making imports to Japan more expensive and fuelling inflation there. Japan is the largest external holder of US bonds.
If Japan sells US bonds and raises interest rates to support the yen, then the price of US bonds could go down. This would force up US interest rates.
Second, US bonds have mostly been held by long-term institutional investors, including the governments of Japan and China. But more and more of the debt is now held by hedge funds.
Hedge funds make big bets and expect short-term gains. This can bring more volatility to the market for treasuries if circumstances suddenly change.
If the economy grows, tax revenues will increase. But it would take unprecedented rates of economic growth to resolve the US debt problem.
In 2025, the Fiscal Lab research centre estimated that the economy would have to grow at over 4 percent for the next ten years to eliminate the deficit.
Such sustained growth has never been achieved in the history of US capitalism.
Other governments around the world have also run up huge debts—Japan over 200 percent of GDP, Italy 137, France 112 and Britain 104.
This debt is pushing up interest rates worldwide, especially with the prospect of rising inflation from the war on Iran and the growing climate disaster.
This is putting massive pressure on governments to cut spending and raise taxes to try and reduce debt levels. But this will also have an adverse effect on economic growth.
These debt levels also mean that governments have less capacity to counter a severe downturn in the world economy by spending more.
US and global economic fragility is growing fast.
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