US Government Debt: How Record Debt Levels Affect the Economy and What Investors Need to Know
The US national debt has reached an all-time high, surpassing $36 trillion. With high debt and elevated interest rates, the situation is becoming increasingly unstable, as recently warned by Federal Reserve Chairman Jerome Powell. This topic is attracting investors’ attention because the high debt burden is affecting key economic indicators and requiring policymakers to make difficult decisions.
The Main Reasons for the Rise of US Government Debt
The rise of US government debt is the result of a complex combination of factors related to budget spending, economic circumstances, and monetary policy. Below are the key reasons that have contributed to the debt accumulation.
1. Persistent Budget Deficits
One of the main reasons for the growth of the national debt is a persistent budget deficit, when government spending exceeds revenues coming into the treasury. Large budget expenditure items include:
Social programs: Extensive social obligations such as pensions, health care, and support for low-income groups of the population require significant expenditures. These expenses, being important for ensuring social stability, constitute a significant part of the annual US budget.
Defense spending: The United States spends heavily on national security and defense, maintaining a military presence in the international arena. Defense spending constitutes a large part of the budget and is a significant factor in increasing the debt burden.
Infrastructure and economic support: Investments in roads, bridges, public transportation, and energy systems also require significant capital investment. These investments are necessary to maintain competitiveness, but they increase budget expenditures.
Health care: Budget expenditures on health care, especially the Medicare and Medicaid programs, are also a significant burden. Rising medical costs and an aging population lead to additional costs in this area.
2. Increased Cost of Debt Service
An increase in the key interest rate of the Federal Reserve System (FRS) has a significant impact on the cost of servicing the national debt. When the borrowing rate rises, the interest burden increases, and the budget funds allocated to repay the debt become more significant.
With rising rates, the cost of paying interest on bonds and other debt instruments increases, which reduces the funds available for other budget programs. As a result, a significant portion of budget revenues is directed to servicing the accumulated debt, aggravating the situation and creating a vicious circle in which debt stimulates further increases in spending.
3. Consequences of the COVID-19 pandemic
The pandemic has had an unprecedented impact on the global economy, and the United States is no exception. In response to the crisis, the US government has undertaken large-scale support programs for the population and businesses, which included:
Direct payment programs to citizens to support purchasing power and stabilize domestic demand.
Government loans and subsidies for small and medium-sized businesses aimed at minimizing the effects of temporary closures and restrictions.
Increased unemployment benefits, which helped citizens cope with financial difficulties, but increased the budget deficit.
These measures were necessary to prevent an economic crisis and provide stability during a period of global uncertainty, but they significantly increased the overall stock of U.S. debt.
These factors increase the debt burden, and structural changes in U.S. economic policy may be needed to stabilize or reduce it.
The Impact of the Debt Burden on the Economy and Financial Markets
The growing U.S. government debt has a significant impact on the domestic and global economy, causing potential risks to the stability of financial markets.
1. Decreased Dollar Stability An increase in the debt burden can weaken confidence in the dollar as a global reserve currency. The dollar has historically occupied a central place in the global financial system, but as government debt increases, concerns arise that the United States may not be able to cope with its debt obligations, which, in turn, pushes investors to look for alternative assets. This can lead to a weakening of the dollar, affecting commodity and financial markets, and also contribute to the growth of other currencies, such as the euro and the yuan.
2. Inflation Risks Additional stimulus and support measures financed by borrowing can create inflationary pressure in the economy. Growing government debt and additional financing at high rates increase inflation expectations. If inflation rises, the Fed may be forced to raise interest rates further, which will further increase the cost of servicing the debt and reduce the availability of borrowed capital for businesses and consumers.
3. Budget Constraints and Reduced Economic Growth
A large debt burden limits the federal budget’s capacity. When large amounts of money are spent on debt servicing, there are fewer resources available for investment in key areas such as infrastructure, education, and innovation. This can slow economic growth in the long term, as investments in the future are replaced by debt payments.
Jerome Powell's Statement and Possible Debt Reduction Measures
Fed Chairman Jerome Powell recently noted that the current level of public debt is unsustainable. In light of this warning, economists and politicians are discussing possible scenarios and measures that could help stabilize the situation.
1. Raise Taxes
One possible solution to the problem could be to raise taxes, especially for large corporations and high-income individuals. This could increase budget revenues and partially reduce the deficit. However, raising taxes is always associated with risks, as it could reduce business activity and slow down economic growth. Nevertheless, this approach would partially offset the deficit and stabilize the growth of debt.
2. Reduce Government Spending Reducing government spending, especially in social and infrastructure programs, could temporarily reduce the deficit. However, such measures are unpopular, as they could negatively affect the standard of living of citizens, the level of employment and social stability. Despite this, reducing spending could have a short-term effect, reducing the need for new borrowing.
3. Selling additional government bonds
The government can increase the volume of government bonds with attractive yields to attract more funds to finance the debt. This may temporarily improve the fiscal position of the budget, but will also increase the interest payment obligations in the future. Selling high-yield bonds may also crowd out private investment from the debt market, as investors will prefer safer government securities.
These measures demonstrate possible ways that can be used to stabilize the debt burden.
Trump's new measures and their possible impact on the national debt
With Donald Trump's recent victory in the election, the attention of the world community and investors is focused on what steps he will take to reduce the US national debt. In his last term, Trump pursued a strategy of economic stimulus through tax breaks and support for businesses. However, this policy also increased the budget deficit, which contributed to the growth of the national debt. With his return to power, Trump may again offer tax breaks and business support programs in an effort to stimulate the domestic economy.
However, experts note that against the backdrop of a record debt of $36 trillion and high interest rates, such a policy could only worsen the debt problem. To avoid a worsening crisis, Trump will likely have to revise budget spending and seek compromises to reduce the debt burden. Otherwise, a further increase in debt could destabilize the US economy and lead to serious consequences for the global economy.
Impact on Russia and Other Countries
The stability of the US government debt has a significant impact on other countries, including Russia. For Russia, the high level of US debt could create both challenges and opportunities. If the Trump administration begins to actively issue government bonds to finance the debt, this could weaken the dollar and cause fluctuations in the currency markets. For Russia, this could be an opportunity to strengthen its international economic ties and reduce dependence on the dollar in trade relations. A weakening US currency could also have a positive effect on Russian export revenues, especially in the commodity sector.
Other countries, especially those that hold significant dollar reserves, could also feel the effects of Trump's new measures. For example, China, as one of the largest holders of US debt, may reconsider its policy if there is a risk of a sharp weakening of the dollar. This, in turn, could stimulate the growth of other currencies and strengthen the financial positions of emerging market countries, but it could also lead to increased instability in their domestic markets.
Global implications and strategies for investors
High US government debt and its potential further increase in light of Trump's new economic policies could change the balance of global economic flows. Investors are advised to consider a strategy of diversification of their assets to minimize risks associated with the dollar and pay attention to safe haven assets such as gold and commodities.
Market impact and strategies for investors
Growing debt creates risks and opportunities for different types of investments. Key areas that may be of interest to investors:
US Treasuries: With high debt, Treasury rates may rise, making them more attractive to investors. However, the debt burden may weaken their appeal in the long term.
Safe Havens: In times of instability, investors may find that safe havens such as gold and commodities are more attractive. These assets help hedge against inflation and financial instability.
Portfolio Diversification: With debt policy instability, it is important to diversify your portfolio to include technology and resource companies that may be resilient to interest rate changes and inflation.
The US national debt of $36 trillion is not only an economic statistic, but also an important signal for investors. As the debt burden rises, investors should closely monitor the actions of the Fed and Congress, which will influence market dynamics. In the context of high debt burden and inflation risks, an approach to asset diversification and the choice of protective instruments can be a key factor in maintaining stability and capital growth in the long term.
