Introduction to the US Debt Crisis
The United States federal government has been running deficits for 23 consecutive years, from 2002 to 2024. This has led to a significant increase in the country’s debt-to-GDP ratio, from 57.2 percent to 124.3 percent. In fiscal year 2024, the federal deficit was $1.83 trillion, pushing the total federal debt past $36 trillion.
The Growing Deficit and Its Effects
The growing deficit is weakening the government’s fiscal maneuvering ability and stoking inflationary pressures. A growing share of the federal budget is being spent on interest payments, which reached 13.2 percent in fiscal year 2024. This has led to a decrease in the share of expenditures that stimulate economic growth, which has fallen sharply to 24.5 percent from 34.4 percent at the turn of the century.
The Impact of US Debt on the Global Economy
The continuous government borrowing has generated sustained global demand for US Treasuries, contributing to an overvalued dollar. This has undermined the competitiveness of US exports and accelerated the offshoring of manufacturing, leading to a long-standing current account deficit. The twin pressures of fiscal and current account deficits will ultimately weaken the underlying credibility of the dollar.
Credit Rating Downgrades and Their Consequences
US government debts remain a cornerstone of central bank reserves and private sector portfolios worldwide. However, with the fast rise in federal deficits and growing uncertainties about the government’s long-term debt servicing capability, major credit rating agencies have downgraded the ratings of US sovereign debts. This will have significant consequences, including higher interest rates and borrowing costs for emerging and developing economies, increasing the likelihood of sovereign debt default.
The Risks to China and the World
China is increasingly exposed to the spillover effects from the US’ mounting fiscal deficits. The inverted yield spread between Chinese and US bonds is fueling short-term capital outflows from China. The tightening US dollar liquidity is expected to increase the financing costs for Chinese entities issuing US dollar debts. The decline in confidence in the dollar could also jeopardize the safety of China’s overseas assets.
Impact on China’s Economy and Financial Stability
The US tax cuts are undermining China’s appeal to foreign investors, making the US a more attractive destination for global capital. The decline in confidence in the dollar could also threaten the value of China’s lending to developing nations. China must closely monitor the evolving US debt landscape and its global spillovers, and strengthen the monitoring of the debt structure and risk exposure of dollar-denominated debt and cross-border assets.
Conclusion
The US debt crisis poses significant risks to the economic and financial stability of the US and the world. China must take steps to mitigate these risks, including diversifying its reserve assets! portfolio, optimizing the asset structure, and deepening regional monetary collaboration. By taking these steps, China can reduce its reliance on the US dollar and minimize the impact of the US debt crisis on its economy. The world must also work together to address the US debt crisis and prevent a global economic downturn.
