According to foreign media reports, America’s debt burden is now on the verge of a record, with a combination of cheap money and soaring debt helping fuel a decade-long economic expansion and a bull market, but the outlook for the U.S. economy is worrying if the fragile economic balance changes. According to the Institute of International Finance, total U.S. public and private debt in the first quarter of 2019 was close to $70 trillion. Federal debt and private corporate debt (excluding banks) hit new highs.
It should be said that the debt itself is not bad. Borrowing money can help governments and businesses grow by injecting vital projects and services, making the country’s economy stronger. Now that the U.S. is still able to handle its debt burden, the size of the country’s economy is about $21 trillion, and the Federal Reserve is preparing to cut interest rates to make lending cheaper. But some analysts say America’s near-record debt burden could be dangerous in the near future.
Now the U.S. economy is beginning to have some cracks. While the U.S. remains one of the most attractive investment locations in the world, its sovereign debt remains a safe investment target for investors. But if the economy slows, the U.S. will have to continue to rely on investors, especially foreign governments, to buy their bonds to sustain growth. And that is likely to happen, and the US government does not seem to be responding well.
The U.S. Treasury Department said Friday that federal funds could run out before Congress resumes in early September (the U.S. government shut down for a record 35 days after running out in December and January), which is why Treasury Secretary Steven Mnuchin urged lawmakers to raise the federal borrowing limit before leaving Washington at the end of the month.
The U.S. Treasury Department said Monday that the talks between Mnuchin and House Speaker Nancy Pelosi were “productive.” The government has not been able to raise money since March because of the borrowing limitset set by Congress. If this administration fails to raise or temporarily lift the debt ceiling, the U.S. could default on its debt, raising borrowing costs and throwing the global economic system into disarray.
Data show that the United States now has a lot of debt to repay. From October to the end of June, the budget deficit jumped more than 23 percent to $747.1 billion, up 23 percent from a year earlier, according to the Treasury report. This is partly due to the impact of the 2017 tax cuts imposed by Donald Trump’s administration. The us government’s debt-to-GDP ratio has soared to 101 per cent as a result of increased government lending, far higher than countries such as France, Canada and Switzerland, the Institute of International Finance said.
“In the long run, a looser financial position of central banks, including the Federal Reserve, will support the government to pile up debt further, which will also raise concerns about the debt-servicing burden and sovereign debt sustainability,” said analysts led by Emre Tiftik, an analyst at the International Finance Association and deputy director of the Global Policy Initiative. “The Fed is expected to cut interest rates at the end of the month, and lower rates may only have a limited help in reducing the u.S. debt interest burden, which translates into about $830 billion in the first quarter.” If the Fed cuts interest rates by 100 basis points, or 1 percent, the bill could cut by $20 billion to $25 billion a year, the If the International Finance Association says. This will help a little, but interest will still be a heavy financial burden on the United States.
Last year, investors began to worry about the so-called “double deficit”, which includes the US budget and the current account deficit. While the market may now turn to other issues, the “double deficit” scenario remains and is growing.