[Global Focus] Debt Ratio 250% in 30 Years... Default Fear Looms Over Economic Powerhouse USA

BofA "US National Debt $33.6 Trillion → $54 Trillion in 10 Years"
CBO Projects Debt Ratio 250% by 2053
Annual Fiscal Deficits Since 2001... Aging Population & Medical Costs Surge
High Interest Rates Increase Treasury Interest by 23%... Exceed Defense Budget
Doubts Over US Debt Repayment Ability... Urgent Need for Fiscal Deficit Measures
Gradual Reduction of Mandatory Spending and Tax Increases Inevitable

"The United States' fiscal deficit will become a more serious problem than ever before in history." (Larry Summers, former U.S. Treasury Secretary)

Warnings are pouring out from Wall Street that the superpower United States could fall into a debt crisis. Astronomical national debt is accumulating due to chronic fiscal deficits, and the repayment burden is rapidly increasing due to the ballooning interest bomb caused by high interest rates. The level of interest the U.S. government pays annually has surpassed the one-year defense budget. Economists and Wall Street magnates have pointed out that the U.S. fiscal management is no longer sustainable.

Credit rating agencies judge that the strong credit of the U.S., as the issuer of the global reserve currency, can no longer offset the risks related to fiscal deficits and debt repayment capacity. Moody's, one of the three major global credit rating agencies, downgraded its rating outlook from 'stable' to 'negative' on the 10th (local time). This came just three months after Fitch downgraded the U.S. sovereign credit rating from the highest 'AAA' to 'AA+' in August. Concerns are spreading that if the U.S. government fails to escape the shackles of fiscal deficits and mounting debt, a U.S. Treasury default and national bankruptcy could become a reality.

"U.S. National Debt to GDP Ratio, 250% in 30 Years"

Bank of America (BofA) forecasted in a report on the 14th that the U.S. national debt will increase from the current $33.6 trillion to about $54 trillion by 2033. This amount exceeds the combined GDP of China, Japan, Germany, and India. Over the next decade, the national debt is expected to increase by $5.2 billion daily and $218 million hourly, resulting in a more than 60% increase in national debt after 10 years.

The Congressional Budget Office (CBO) projected that the national debt-to-GDP ratio will soar from the current 100% to a maximum of 250% by 2053. Under an optimistic scenario where discretionary spending is drastically cut to about half of GDP, the ratio would be 181% in 30 years, but if borrowing and spending continue at the current pace, it will reach 250%.

The U.S. national debt is already increasing rapidly. It rose 45% in just three and a half years, from $23.2 trillion at the end of March 2020, right after the outbreak of COVID-19, to over $33 trillion currently.

As fiscal deficits grew, national debt also increased. The U.S. government has run a deficit every year since recording a fiscal surplus in 2001. The deficit amount is also on the rise. For the 2023 fiscal year, the fiscal deficit was $1.7 trillion, a 23% increase from the previous year. Since government expenditures exceed tax revenues, deficits occur, and issuing government bonds to cover these deficits has repeatedly caused the accumulated national debt to increase rapidly.

Structural social and economic costs such as population aging and rising medical expenses have expanded the fiscal deficit. Historically, deficits occurred during national emergencies like the Great Depression and World War II when government spending surged, but the current situation is different. Particularly, the retirement of the baby boomer generation has significantly increased social security costs such as Medicare. The U.S. population aged 65 and over is expected to surge from 56.1 million in 2020 to 80.8 million in 2040 and 94.7 million in 2060, indicating that social security spending will increase much more in the future.

Although social costs have greatly increased, government revenues have not kept pace. The U.S. federal government collected $4.9 trillion in revenue last year, while expenditures totaled $6.3 trillion. In a situation where reducing the fiscal deficit is necessary, former President Donald Trump implemented tax cuts, and current President Joe Biden worsened the fiscal situation through expansionary fiscal policies. In particular, President Biden has consecutively implemented industrial policies that distribute subsidies, such as the CHIPS and Science Act (CSA) and the Inflation Reduction Act (IRA), and government spending has further increased as the U.S. engaged in two fronts?the Israel war and the Ukraine war.

U.S. Government's Annual Interest Burden at Defense Budget Level... Deficit Reduction and Tax Increase Inevitable

[Image source=Yonhap News]

Although the U.S. government is burdened with such massive debt, concerns about debt repayment were low due to low interest rates. However, to absorb the liquidity released after COVID-19, the Federal Reserve (Fed), the central bank, sharply raised the benchmark interest rate. Starting rate hikes in March last year, the Fed raised the benchmark rate from 0?0.25% to 5.25?5.5% in just a year and a half. With the U.S. national debt itself greatly increased and interest costs soaring, the government's burden has rapidly grown. The interest on government bonds paid by the U.S. government in the 2023 fiscal year was $879.3 billion, a 23% increase from $717.6 billion a year earlier. This accounts for about 15% of the total annual budget of $5.8 trillion, surpassing the U.S. defense budget of $858 billion. Jeffrey Gundlach, CEO of DoubleLine Capital, known as the 'Bond King of Wall Street,' pointed out, "The enormous fiscal deficit could eventually overwhelm the government's debt repayment capacity," adding, "The government cannot operate at the current interest rate level."

The market, which had been watching the government with concern, experienced a worsening supply-demand imbalance in U.S. Treasury bonds. The chronically deficit-ridden U.S. government has been continuously issuing Treasury bonds to cover fiscal deficits, and investors have been unable to absorb the flood of U.S. Treasury bonds. The proportion of foreign investors holding U.S. Treasury bonds has noticeably decreased. As of June this year, foreign investors held 30.4% of U.S. Treasury bonds, down significantly from 56.1% in June 2008 and 41% at the end of 2019. Concerns over increased Treasury bond supply due to U.S. fiscal deficits, combined with Fed rate hikes, pushed the 10-year U.S. Treasury yield above 5% last month for the first time in 16 years.

Although market trust in the U.S., which holds dollar hegemony, is absolute, as the market begins to question the U.S.'s debt repayment ability, there is speculation that even the U.S. Treasury bonds of the superpower might be shunned. Accounting firm Deloitte stated, "If global investors conclude that the U.S. cannot repay its debt, a sell-off of U.S. Treasury bonds will occur," adding, "This (the U.S.) plane will suddenly stop and eventually crash." Maurice Obstfeld, Chief Economist at the International Monetary Fund (IMF), expressed concern, saying, "If trust that the U.S. government can repay principal and interest on debt is broken, it will itself cause destructive consequences in the global financial market."

Experts warn that urgent measures are needed to stop the surge in the U.S. fiscal deficit. Increasing the debt ceiling is only a 'band-aid solution' to prevent immediate default; fundamentally, a phased reduction of mandatory spending, which accounts for two-thirds of total federal spending, and tax increases are inevitable. Stanley Druckenmiller, known as a hedge fund legend, predicted, "The U.S. federal government has spent an enormous amount in recent years," adding, "Ultimately, it will lead to difficult choices such as social security cuts." Former Secretary Summers emphasized, "When I served as Treasury Secretary, the government tried to reduce fiscal deficits through tax increases and spending cuts," and stressed, "Before painful spending cuts, revenue must be secured."

Some speculate that the Fed will eventually step in as the U.S. government's rescuer. Michael Hartnett, BofA investment strategist, predicted, "The central bank may introduce quantitative easing (buying U.S. Treasury bonds) and yield curve control policies (which negatively affect the U.S. dollar value) within the next few years."