The United States’ federal government debt has recently surpassed $35 trillion, making it the largest in the world in absolute terms. While the U.S. economy remains robust, this soaring debt raises questions about its causes and global implications.
Despite the considerable size of the debt, the United States’ debt-to-GDP ratio stands at approximately 123 percent for 2023. This figure, although significant, is still lower than that of countries like Japan and Italy.
Political debates within the United States often attribute the growing debt to domestic policies. Republicans point to what they label as “reckless” public spending under the Joe Biden administration. Conversely, Democrats highlight the “reckless” tax cuts implemented during the previous administration and the record debt left behind.
However, focusing solely on domestic factors overlooks the significant international structural elements that contribute to the expanding debt. A key factor is the international status of the U.S. dollar as the primary currency for global trade and as the world’s reserve currency.
The U.S. dollar’s dominant role inflates its value relative to other currencies. This strength in the dollar reduces the competitiveness of U.S. exports, leading to lower domestic production compared to domestic demand, and resulting in a trade deficit.
Countries experiencing trade deficits face two main options: accept higher unemployment due to decreased domestic production or take on higher debt to maintain employment and domestic demand. The United States has largely chosen the latter, financing its trade deficit through increased public debt.
This cycle is self-reinforcing. The large budget deficits and growing debt supply the global economy with U.S. dollars needed for international trade and reserves, further entrenching the dollar’s status and perpetuating the cycle of debt.
On the global stage, the United States’ high levels of public spending and debt have complex effects. On one hand, the strong domestic demand resulting from budget deficits supports global economic growth by increasing demand for imports from other countries.
However, reliance on this model raises concerns about sustainability and the potential impacts of shifts in the dollar’s global status. As discussions about diversifying global reserves gain traction, changes in the dollar’s dominance could have significant implications for the U.S. economy and the global financial system.
Understanding the interplay between the United States’ public debt and the international role of the U.S. dollar is crucial. It sheds light on the global economic dynamics and the challenges and opportunities that lie ahead for economies worldwide.
Reference(s):
U.S.'s record debt: Global currency status and economic consequences
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