The United States faces significant scrutiny regarding its financial health as the national debt has surged to an alarming $37 trillion. Our economy is producing about $25 trillion annually. Now an unlikely group of experts have begun cautioning that the debt increase—even if justified—might not be sustainable. Recent fiscal policies, particularly the tax cuts advocated by former President Donald Trump, will only exacerbate the trend. Experts are already projecting that taken together, these measures could add a whopping $3 trillion to the national debt.
With the federal budget deficit at historical highs of around 6%, there is an urgent need for more fiscally responsible budgeting. Some analysts argue that cutting the budget deficit down to 3% would be enough to prevent more future economic disaster. Compounding the problem, the U.S. is on track to spend $10 trillion+ over the next decade on loan/interest repayments alone. This projection raises alarms about the long-term viability of current spending patterns, especially as the country seeks to balance its income against its expenditures.
Worries over the U.S. debt-to-income ratio have increased, especially relative to other countries. Though of course still higher than most countries, it is still lower than Japan and Italy. In many ways, the U.S. economy is the most innovative, wealth-producing economic engine in the history of the world. A big dark cloud on the horizon is the upsurging levels of debt.
Over the past few months, though, the dollar has absorbed one of its worst blows. It has plummeted 10% against the pound and 15% against the euro since the beginning of the year. This dollar decline has caused a rush of investors to the exit looking to sell their dollars. Mohamed El-Erian, a prominent economist, commented on the situation, stating:
“The dollar is overweight and the world knows it, which is why we have seen a rise in gold, the euro and the pound, but it’s hard to move at scale so there’s really very few places to go.” – Mohamed El-Erian
Going further, there is evidence that the U.S. monetary authority is preparing to go back to the printing press to buy more government debt directly. While this move might offer immediate relief, it is a gamechanger because it sets the stage for long-term inflationary pressure and jeopardizes economic stability. The yield curve is widening, signaling increasing borrowing costs over all maturities. This change represents a deepening skepticism toward the U.S. government’s ability to borrow.
Ray Dalio, founder of Bridgewater Associates, has been warning about the urgency of our need to fix these financial problems. He noted:
“I am confident that the [US] government’s financial condition is at an inflection point because, if this is not dealt with now, the debts will build up to levels where they can’t be managed without great trauma.” – Ray Dalio
The complexity of U.S. fiscal challenges is underscored by a simple analogy: if one were to save a million dollars every day, it would take 100,000 years to amass $10 trillion. This chilling example drives home the magnitude of the nation’s fiscal commitment and emphasizes the need for urgent action.
Nevertheless, even amid these commodity price explosions and inflationary force, some are still bullish about finding answers. The call to end the budget deficit strikes a chord at a time when many are calling for a more fiscally responsible plan. Such a spending reduction would do more than help maintain a balanced economy – it would re-establish confidence among jittery investors and the international markets.