The US debt…the danger that is coming from the West

Earlier this week, the US public debt broke the barrier of $34.6 trillion, constituting more than 149% of the gross domestic product.

Public debt figures, which amount to $34.62 trillion as of Friday, according to US Treasury Department data, have become a source of concern for financial and monetary policy makers in the United States, and even central banks around the world.

Of the total public debt, there is direct debt on the federal government, amounting to more than $22 trillion, which constitutes approximately 97% of the United States’ gross domestic product, up from $17 trillion at the end of 2019, before the outbreak of Covid-19 pandemic.

The growth of public debt coincides with the rise in efforts from countries around the world – especially the countries of the South – to curb the importance of the US dollar in the global economy and in the payments of those countries led by China, Brazil, Russia and India, given that the growth of debt numbers to greater levels may affect the status of the US dollar.

According to Bloomberg report in which it said that the future outlook for US public debt numbers is very worrying.

According to the latest forecasts from the Congressional Budget Office, the US federal government’s debt is on track from 97% of GDP last year to 116% by 2034.

The Congressional Budget Office’s forecasts are based on rosy assumptions.

“If we embrace the current market view on interest rates, the debt-to-GDP ratio will rise to 123% in 2034,” Bloomberg Economics says, adding that “If the tax cuts approved by former President Donald Trump remain in place, the burden will become higher, reaching 128%”.

The high interest rates affect the total value of public debt, including federal debt, because it increases the value of the interest charged on these loans.

Today, the interest rates set by the US Federal Reserve are 5.5%, the highest level since 2001, but Fed Chairman Jerome Powell hinted on more than one occasion, most recently on Wednesday, that the Fed will begin lowering interest rates by the second half of 2024.

In light of the uncertainty about many variables: Bloomberg Economics conducted a million simulations to assess the vulnerability of the US debt outlook during the coming period.

In 88% of the million simulations, the results showed that the debt-to-GDP ratio is on an unsustainable path, and poses a danger to the US economy and the US currency.

In May 2023, a crisis broke out between Republicans and Democrats over raising the US debt ceiling, which amounted to approximately $31 trillion.

At that time, the US Treasury Department warned that the threat of US debt “will create crises whose results we cannot predict”.

The Democrats wanted to raise the debt ceiling to obtain funds, which required the approval of Congress with a majority of Republicans, which was done after a long debate that affected the dollar and financial markets.

The greatest threat to the dollar’s position is represented by the rise in US debt, the federal government’s inability to repay, and another inability to continue borrowing.

The International Monetary Fund data show that the US dollar’s ​​share of the Fund’s total international reserves is approximately 57% of the total, but it’s the lowest percentage in nearly 5 decades, amid a decline in its share, which was up to 72%.

While the remaining percentage is distributed among other major currencies, such as the European Euro, the Japanese yen, the Chinese yuan, the British pound, and the Swiss franc.

Today, the US dollar is witnessing strength against other currencies, which arouses the ire of central bank governors and governments around the world, and forces them to take action to ease the pressures imposed on their currencies.

From Tokyo to Latin America, through the European Union and Africa, policymakers are intervening to defend exchange rates in word and deed, while the Federal Reserve is trying to maintain the strength of the US dollar.

According to data from the Bank for International Settlements, the US dollar rose against almost all major currencies in 2024, defying many on Wall Street, who entered the year expecting dollar sales.

However, this power is considered to be unfavorable to the United States, specifically in terms of exports, as a strong currency reduces the competitiveness of the country’s exports to the benefit of other countries.

Therefore, data from the US Department of Commerce reveal that for more than 50 years, the United States has been witnessing a deficit in its trade balance, despite the strength of its exports, but the strong American currency reduces the competitiveness of exports.