Global impact of ballooning US debt
The US can print its currency to cover its external account, but this practice can only continue as long as countries like China, Japan, and Saudi Arabia are willing to buy US debt and hold dollars as a reserve currency. photo: file
Ballooning US national debt, now at $35.06 trillion, could have significant implications for the global economy. The skyrocketing US debt may shatter investor confidence and lead to concerns about the US's ability to manage its finances, potentially causing global investors to reassess their risk exposure and shift investments. This shift could impact global financial markets. High US debt could also weaken the US dollar if investors fear inflation or fiscal instability, affecting global trade balances and currency exchange rates. Additionally, increased debt might prompt higher interest rates to attract investors, influencing global borrowing costs and capital flows. If debt levels lead to reduced US government spending on international aid or investment, it could hamper global economic growth and development.
Regarding global stock market sentiments, sharp declines can be driven by concerns over US debt, affecting investor confidence worldwide and leading to broader market sell-offs. Significant stock market drops might reflect or exacerbate fears about the health of the US economy and its impact on global economic stability. Instability in US markets due to high debt could lead to shifts in global investment patterns, affecting economies that are heavily dependent on foreign investment. Stock markets generally hinge on two facets: company earnings and interest rates. When the economy slows, it is widely believed that company earnings will decline or stop growing. Additionally, if global interest rates rise, stock prices will likely fall.
US debt accumulation also affects global trade by influencing the dollar's value and the global economic environment. High debt can lead to trade imbalances and impact international trade policies. US borrowing impacts its ability to project economic power globally, with high debt levels potentially limiting its capacity to use economic tools effectively in international relations.
"Global stock market declines can reduce household and corporate wealth, leading to decreased spending and investment worldwide. Falling stock markets can reduce business confidence and slow investment in various countries, impacting global economic growth. Interconnected global markets mean that severe drops in one major market can lead to economic disruptions and market corrections in others," said Khurram Schehzad, CEO of Alpha Beta Core (ABC).
The portion of US debt held by foreign governments can also affect global economic stability. Large holders like China and Japan may influence US economic policies and market stability. The historical pattern of US debt accumulation shows periods of significant global economic impact, as large debts can affect global trade, investment flows, and economic policies across countries. The US national debt and global stock market movements have widespread implications for international financial stability, investor confidence, and global economic dynamics.
Yousuf M Farooq, Director of Research at Chase Securities, commented, "Why does the US government keep taking on debt, now totalling around $35.06 trillion? It collects less revenue than it spends. To cover the deficit, it has to sell US bonds and treasury bills, which is why the debt is rising day by day. Pakistan's government faces a similar situation with less income and higher spending. The only difference is that the US government can print as many dollars as it needs. We expect that some countries will lend to us. Ultimately, the US must ensure that some countries will be willing to purchase its debt and lend."
In the context of Pakistan, the country must take loans in dollars from other countries. The US can print its currency to cover its external account, but this practice can only continue as long as countries like China, Japan, and Saudi Arabia are willing to buy US debt and hold dollars as a reserve currency. If these foreign countries are unwilling to purchase US debt, the US currency could depreciate. Problems arise when debt is needed, and others are reluctant to buy it.
Historically, reserve currencies have shifted with global economic power. Four to five centuries ago, the Dutch guilder was the reserve currency when the Dutch economy was dominant. Later, the British pound took over when the UK was a global power. Today, the US dollar prevails as the global reserve currency, dominating the current financial system.
Generally, the country with the most significant international trade sees its currency used as a reserve currency, benefiting from the ability to print and create debt. While more global trade is now conducted in Chinese yuan, the US dollar remains the primary reserve currency. However, this was not always the case. Five to six hundred years ago, the currency of the most active trading nation became the dominant reserve currency. But this phenomenon has changed.
BRICS leaders are now trying to change the reserve currency, but the US is determined to maintain the dollar's status. Until another international currency emerges in the global financial architecture, the US will continue to accumulate debt without significant repercussions.
Contrary to the general perception of the US economy, economic analyst Syed Asad Ali Shah argued, "Advancements in Artificial Intelligence (AI), Generative AI firms, and other technologies are predicting that the world's GDP could double in ten years, with much of the growth coming from the US economy and its innovation ecosystem. The future belongs to AI and emerging exponential technologies, and the US dominates this space."
He added that despite the enormous debt, the US economy remains dynamic and robust compared to any other economy in the world. All major technological advancements, including those from high-tech companies like Microsoft, Apple, and Google, are happening in the US. Over $35 trillion in debt will not have significant adverse implications for the US economy. Some concerns about a temporary recession in the US economy have been raised, and the US government may increase interest rates to contain inflation. Still, $35 trillion in debt is not a major issue for the US economy. Swelling US debts do not pose a significant risk to the global economy, as the US dollar will remain strong and continue as the world's major currency.
THE WRITER IS A STAFF CORRESPONDENT