The U.S. Remains the World’s Leading Economy, Experts Call for Policy Changes
The American economy holds the position of the largest in the world, signifying its critical global importance. However, the substantial accumulation of U.S. debt is raising concerns among economists. Some believe that this debt is held by numerous countries that have strong confidence in their investment. We consulted leading experts on whether the level of U.S. debt is becoming worrisome. They suggested that this issue could be crucial in the coming years.
Increasing Debt Concerns
Research indicates that U.S. debt has risen by $26.3 trillion over the past 15 years. While the U.S. boasts a large economy, inefficiencies in spending are evident. Addressing this issue would necessitate an extraordinary increase in productivity, along with exceptional constraints that could significantly impact society. As a result, such decisions are not easy to make.
Expert Insights
Daniel Vasilev, an economist and market analyst, emphasized that the massive accumulation of debt has been a concern for quite some time, but the problem is that the debt is currently growing at an exponential rate. Around 60 years ago, 0.14 units of new debt were needed to achieve one unit of economic growth in the U.S.; by 2020, this ratio had escalated to 1.56 units of new debt for the same economic growth. This means that there is now over ten times more debt required to generate just 1% economic growth. Presently, this ratio may exceed 2, considering the rate at which U.S. debt is increasing.
Under President Joe Biden’s administration, approximately $4 trillion in new debt has been accumulated. In comparison, it took more than 200 years of American history to reach the first $4 trillion in debt, as the total external debt of the U.S. was about $4.2 trillion at the beginning of the 1980s. Unfunded liabilities refer to budgetary expenses for which no current revenues are collected. Typically, such expenses are covered by tax revenues or by incurring new debt. These expenses include various forms of assistance and support, including unemployment benefits. In the U.S., these benefits are substantial and their trend is toward growth over time.
It would be prudent for the U.S. to take measures to address these challenges.
US Debt: A Growing Concern for Economists
The structural reforms in the expenditure side of the budget are crucial as the United States capitalizes on the privileged status of its currency. This allows the country to return to the foundations of natural economic growth driven by the private sector, which has been pivotal in establishing the US as a global superpower.
Current State of US Debt
According to Martin Tarpanov, Head of the Debt Instruments Department at DeltaStock, the figures concerning US debt are alarming. The national debt has surged to approximately $35 trillion, with a current GDP of $28.5 trillion, resulting in a debt-to-GDP ratio of 123%. Historically, from 1990 to 2010, the US debt ratio fluctuated between 50% and 60%. The country only experienced such high debt levels once before, during World War II, peaking at around 115% between 1940 and 1946. At that time, the US managed to reduce this ratio through rapid growth and tightened fiscal discipline.
Implications of Rising Interest Rates
One of the significant issues arising from high debt levels is the rapid increase in interest expenses. It is anticipated that these costs could reach $1.5 trillion by the end of next year. This presents a serious problem with no apparent solution, and the upcoming presidential candidates have yet to address this critical issue. As GDP growth continues to lag behind the rising debt, the US faces a troubling scenario. The pressing question remains: who will purchase the massive debt that is set to be issued in the coming years?
Concerns Among Analysts
Georgi Georgiev, Portfolio Manager at Karoll Capital, notes that the US debt has reached dangerously high levels, having nearly doubled in the past seven years. Projections suggest it could hit $40 trillion in the next 18 months. Many analysts are alarmed by this absolute value, but it is essential to contextualize it historically by comparing GDP to debt. The data indicates that when the debt surpasses 100% of GDP, many countries face severe challenges and often resort to higher inflation to manage their debts. The American economy heavily relies on debt financing, particularly short-term debt, which is likely to have negative repercussions. Future tax increases are also anticipated to cover this deficit, jeopardizing social services.
The Investor Perspective
Kalin Georgiev, Financial Analyst at BenchMark Finance, emphasizes that the topic of US debt remains highly relevant and under constant scrutiny from investors. US government securities are considered among the safest assets and are widely incorporated into many investment portfolios. Recently, the Federal Reserve was compelled to raise interest rates in response to inflation, leading to increased interest costs. As we approach a point where the Fed might start reducing interest rates, the focus shifts to the future domestic policies of the next administration. These policies will directly impact the debt levels, and any significant changes could potentially increase the debt further.
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