The United States is facing mounting political risks as the federal interest burden surpasses the unprecedented $1 trillion mark. According to the U.S. Treasury Department, the federal budget deficit grew to $1.833 trillion for the 2024 fiscal year, which ended on September 30, marking the highest deficit outside the COVID-19 era.
This staggering deficit now represents 6.4% of the U.S. Gross Domestic Product (GDP), up from 6.2% the previous year, as reported by Reuters. The confluence of historically high budget deficits and rising interest rates has contributed to this significant increase.
The ballooning deficits are attributed to unprecedented spending to combat the COVID-19 pandemic, revenue limitations from the 2017 tax cuts, and a continual rise in Social Security and Medicare costs. Additionally, the inflation-induced interest rate hikes have escalated the cost of servicing the federal debt, as highlighted by Bloomberg.
For decades, the dominance of the U.S. dollar in international financial markets has underpinned America’s economic leadership. The dollar’s supremacy affords the United States unique advantages, including cheaper borrowing costs, the ability to impose extensive sanctions, and immunity from exchange rate fluctuations that could devalue its debt.
However, concerns are rising that the nation’s mounting debt could undermine this global dominance. Upamanyu Lahiri, a policy analyst writing for the Bipartisan Policy Center, noted that while the dollar is used in about 90% of international foreign exchange transactions and holds almost 60% of global foreign exchange reserves, the escalating national debt may erode these advantages.
“The loss of the disproportionate advantages that the United States has could eventually result in slower economic development, increased unemployment, and decreased equity wealth,” Lahiri explained. The decline in the dollar’s value might make American companies less appealing to international investors, hindering the financing of new ventures and corporate expansions. Moreover, price increases could affect individuals and businesses reliant on imported goods.
Echoing these concerns, Luan Wenlian, a researcher from the Chinese Academy of Social Sciences, emphasized the global implications of the U.S. financial strategies. “Finance is an important means of transferring the debt burden of the United States,” Luan stated. He explained that the Federal Reserve’s repeated interest rate hikes have strengthened the dollar, leading to the depreciation of other countries’ currencies, especially in developing nations. This, in turn, raises their debt-servicing costs and causes capital outflows back to the United States.
With the Federal Reserve implementing its first interest rate cut in over four years, Luan warned of the potential repercussions. “The ensuing depreciation of the dollar will bring both imported inflation to other countries and a shrinking of their dollar-denominated reserves and U.S. debt assets,” he cautioned.
The interplay between the U.S. fiscal policies and global economic stability underscores the intricate balance of international finance. As the United States grapples with its burgeoning debt and interest burdens, the ripple effects are felt far beyond its borders, potentially reshaping economic landscapes worldwide.
The escalating interest burden not only heightens domestic political risks but also poses challenges to the global economic order. Stakeholders around the world are closely monitoring the situation, anticipating how these developments will influence both the U.S. economy and international financial markets.
Reference(s):
cgtn.com
