U.S. Debt: A Growing Risk of Financial Crisis
Let’s be real—the U.S. debt crisis is getting harder to ignore, and it might just be the catalyst for our next major financial crisis. I’ve been involved in some of America’s most pivotal moments in recent financial history—from the 9/11 aftermath to the 2008 financial crash. Every crisis has led to increased government spending to stabilise the economy. It was the right choice, but we didn’t hit the brakes on spending when those crises ended. Now, national debt sits at a record-breaking $35 trillion, reaching 99% of our GDP. That’s a red flag.
The Escalating U.S. Debt: Why It’s Worrying
Federal debt is not just a statistic; it’s a ticking time bomb. Unlike the aftermath of WWII, when U.S. leaders responsibly brought down the debt-to-GDP ratio, today’s political climate is far less concerned with reducing deficits. Here’s how that debt has ballooned:
- Post-WWII Era: Debt was lowered to 31% of GDP by 1981.
- Current Debt Levels: Today, it’s back up to nearly 100% of GDP, hitting levels last seen during global war.
While government spending keeps the economy afloat during crises, continuous deficit spending without a clear repayment plan is risky. Politicians from both parties have often leaned on deficits as a way to please their voters—whether through tax cuts or increased social spending. And in election years, this spending increases with few thinking of the long-term consequences.
The Debt Crisis and Political Promises
Let’s talk about how political promises add to the debt. In the current election cycle, both presidential candidates are proposing tax cuts and new spending initiatives to win favour with voters. But how does this impact debt?
- Vice President Kamala Harris’s Plan: Estimated to increase debt by $3.95 trillion over the next decade.
- Former President Donald Trump’s Plan: A potential increase of $7.75 trillion.
Each of these proposals is simply not sustainable. With Social Security expected to run out by 2035 and Medicare running low by 2036, politicians are avoiding the uncomfortable truth: we’re on a path to a debt-fuelled crisis, and no one wants to take the politically painful steps to change course.
Why the Dollar’s Status Might Not Save Us
For decades, the U.S. has enjoyed the unique privilege of having the dollar as the world’s reserve currency. This status has allowed America to borrow without facing the full consequences. But things are shifting:
- Global Reserves: The dollar’s share in global reserves has dropped from 70% in 2000 to 58%.
- Foreign Ownership of U.S. Treasuries: Down from 34% in 2012 to 28% today.
Even with this privileged status, international confidence in the U.S. dollar is waning. And if it continues, other nations may look elsewhere to store their wealth. Losing reserve currency status could significantly impact America’s economy, with repercussions for everything from interest rates to global market stability.
The High Cost of Maintaining Record Debt Levels
If investors lose confidence in U.S. debt, the cost of borrowing will skyrocket. We’re already paying $892 billion in interest on debt annually. Here’s what could happen if things spiral:
- Higher Interest Rates: Investors will demand higher returns to account for increased risk.
- Spending Cuts or Tax Hikes: The government would be forced to make difficult cuts to essential services or raise taxes.
- Private Sector Impact: Businesses will face higher borrowing costs, stalling growth and investments.
This situation would affect nearly every American, from businesses relying on affordable loans to individuals with savings tied to investment funds holding U.S. Treasury bonds.
Potential Financial Crisis: How It Could Unfold
If the U.S. government continues accumulating debt without a sustainable reduction strategy, here’s a breakdown of the likely scenario:
- Investor Confidence Drops: As confidence erodes, foreign and domestic investors could shy away from U.S. debt.
- Market Panic: As debt values drop, financial institutions with large Treasury holdings will experience significant losses.
- Recession Risk: High-interest rates on government and private debt would likely slow economic growth, pushing the U.S. into a recession.
Many analysts agree this trajectory isn’t sustainable. In a recent survey of over 4,000 members of the CFA Institute, 77% said the U.S.’s financial direction was unsustainable, with 63% predicting a potential loss of reserve currency status within the next 5 to 15 years.
Can We Avoid a Debt-Fuelled Financial Crisis?
The reality is that solutions to the debt crisis aren’t popular. Tackling deficit reduction will require difficult trade-offs. Here’s what would help:
- Political Leadership and Accountability: Leaders need to commit to responsible fiscal policies, even when it’s politically difficult.
- Gradual Spending Reductions: Phasing out unnecessary programs and implementing modest tax increases could begin to address the gap.
- Reform of Entitlement Programs: Without addressing Social Security and Medicare funding shortfalls, any solution will be short-lived.
A sustainable path forward is possible, but it requires commitment, tough choices, and likely bipartisan support. The stakes are high, and without meaningful action, the U.S. could face another financial crisis—this time driven by our own debt.
