The United States’ national debt has surpassed $37 trillion, sparking concerns about the sustainability of US borrowing. Donald Trump’s tax-cutting budget bill, which is expected to add at least $3 trillion to the debt pile, has drawn criticism from notable figures like Elon Musk, who called it a “disgusting abomination”. The growing debt has led to doubts about the limit of global lending to the US, reflected in the dollar’s recent decline against major currencies.
The dollar has fallen 10% against the pound and 15% against the euro since the beginning of the year. Despite steady US borrowing costs, the yield curve has steepened, signaling increased doubts about long-term US borrowing sustainability.
Ray Dalio, founder of the world’s largest hedge fund, believes US borrowing is at a crossroads, estimating that the country will soon spend $10 trillion annually on loan and interest repayments. “I am confident that the [US] government’s financial condition is at an inflection point because, if this is not dealt with now, the debts will build up to levels where they can’t be managed without great trauma,” he warns.
The potential trauma could manifest in several ways:
- Drastic Reduction in Government Spending: A significant cut in government spending or a substantial increase in taxes could help mitigate the debt.
- Printing More Money: The US central bank could print more money to buy up government debt, but this might fuel inflation and inequality.
- US Default: A straightforward default on debt obligations would have severe implications for the global financial system.
Despite these risks, the world currently has few alternatives to the dollar. Economist Mohamed El-Erian likens the dollar’s status to “your cleanest dirty shirt, you have to keep wearing it,” highlighting the challenges of moving away from the dollar at scale. While the dollar’s value is not guaranteed, it remains the global reserve currency, supported by the US’s innovative and wealth-creating economy.
The Congressional Budget Office (CBO) projects federal debt rising from 100% of GDP in 2025 to 118% by 2035 and 156% by 2055. Experts recommend a balanced approach, combining fiscal discipline with economic growth strategies to stabilize the debt trajectory. Potential solutions include:
- Fiscal Reforms: Implementing policies that balance growth with sustainable debt levels.
- Entitlement Program Adjustments: Reforming programs like Social Security and Medicare to ensure long-term sustainability.
- Strategic Investments: Focusing on sectors that promise long-term economic benefits, such as education, innovation, and infrastructure.
The future of the dollar and US government bonds is being closely monitored, with the Bank of England’s governor stating that US Treasury Secretary Janet Yellen is aware of the debt situation’s seriousness. While the dollar’s status is not fundamentally under threat, the risks associated with high debt levels necessitate careful management and planning.