[Opinion] US Debt Crisis, a Potential Risk to the Global Economy

Since becoming a debtor nation in the mid-1980s, the United States' federal government debt has steadily increased. The pace of growth has been even steeper over the past 20 years. Astronomical expenditures were made on the Afghanistan and Iraq wars, and significant fiscal spending followed the 2008 financial crisis. After the COVID-19 pandemic emerged in 2020, spending surged sharply. Between 2019 and 2021, federal government spending increased by 50%. The U.S. federal government debt was $18.43 trillion in 2010, but by the end of 2022, it had reached a staggering $30.93 trillion. The debt-to-GDP ratio hit 100% in 2012 and recorded 124% by the end of 2022.

The interest on this debt is also substantial. In 2022 alone, the federal government spent $475 billion on interest, a significant increase from the $352 billion spent the previous year. Some analyses predict that by around 2025, the federal government's interest payments will exceed the entire defense budget. Furthermore, interest payments are projected to account for more than 40% of federal government revenue by 2052. If this happens, the federal government may have to drastically cut discretionary spending, such as education and defense-related expenditures. The U.S. debt issue is one of the biggest challenges the country will face in the future. For this reason, former U.S. Joint Chiefs of Staff Chairman Michael Mullen pointed out that the greatest threat to U.S. national security is debt.

Under the current system, when the debt ceiling set by the U.S. Congress is reached, the U.S. Treasury cannot issue new bonds unless Congress raises the debt ceiling. The U.S. Treasury Secretary announced that the ceiling would be reached this month. Now, the debt ceiling must be raised. The problem arose when the Republican Party gained the majority in the House of Representatives in the midterm elections. Some hardline Republican members, represented by Representative Ralph Norman from South Carolina, argue that the government should shut down rather than raise the debt ceiling. They believe federal government spending is excessive and must be cut. They see overspending as a driver of inflation. It has been reported that newly elected House Speaker Kevin McCarthy agreed to respect the views of these hardliners on the debt ceiling issue to secure their support during the speaker election. This raises the possibility of a major crisis soon.

A concerning point is the possibility that the two parties may fail to reach an agreement before the deadline. If this happens, signs of a financial crisis may emerge. The U.S. Treasury market, considered the core of the global financial market, could be shaken, which would ripple through financial markets worldwide. There is precedent. In 2011, the day before the Republican Party agreed to raise the debt ceiling, the S&P 500 index fell by 6%. Three days later, after the credit rating agency S&P downgraded the U.S. credit rating, stock prices fell further. At that time, Federal Reserve Chairman Ben Bernanke criticized Congress for unsettling the financial markets and warned that if a similar event occurred in the future, global investors might hesitate to hold U.S. financial assets or invest directly in the U.S. Considering the much larger federal government debt now compared to then, such turmoil could someday shake confidence in the U.S. dollar.

Ultimately, it is expected that the two parties will compromise, but hardline Republicans will demand government spending cuts in exchange for raising the debt ceiling. However, reduced government spending could deepen the economic downturn and increase unemployment. Such turmoil might lead to interest rate hikes, increasing the U.S. government's borrowing costs, as happened in 2011. In a year when the outlook for the global economy is bleak for various reasons, this is another potential risk to watch closely.

Kim Dong-gi, author of 'The Power of Geopolitics'