The Congressional Budget Office (CBO) has warned in its latest forecast that by 2034, the proportion of US federal government debt to GDP will rise from 97% last year to 116%, even higher than during World War II. Moreover, the actual prospects may be even worse.
The CBO's predictions released earlier this year, from taxes to defense spending to interest rates, were all based on optimistic assumptions. However, based on the current market view of interest rates (which have remained high for a longer period of time), analysts predict that the debt to GDP ratio will rise to 123% by 2034.
If we assume that former President Trump's tax cuts remain largely unchanged, the burden will become even heavier. On the other hand, the Biden administration said that its budget includes significant tax increases for businesses and wealthy Americans, which will ensure fiscal sustainability and controllable debt repayment costs.
Due to the presence of so many uncertain variables, Bloomberg Economics conducted 1 million simulations to assess the fragility of the debt outlook. The results show that in 88% of simulations, the debt to GDP ratio is on an unsustainable path - that is, it will rise in the next decade.
In February, US Treasury Secretary Yellen told congressmen, "I do believe we need to reduce the deficit and stay on a path of fiscal sustainability." The Biden administration's proposal proposes to "significantly reduce the deficit and continue to keep interest expenses at satisfactory levels.".
The problem is that implementing such a plan requires Congress to take action, and Congress has serious differences on party lines. The Republicans who control the House of Representatives hope to significantly reduce spending to lower the expanding deficit, but have not specified what they will cut. Democrats who control the Senate believe that spending has a smaller impact on deteriorating debt sustainability, with interest rates and taxes being key factors.
Eventually, it may turn into a crisis - perhaps the disorderly collapse of the US treasury bond bond market caused by the downgrade of the US sovereign credit rating, or the panic caused by the exhaustion of the federal medical insurance or social security trust funds, which will force policy makers to take action.
Last summer, it provided a microcosm of the crisis, allowing you to experience how the crisis began. In August, Fitch downgraded the credit rating of the United States and increased the issuance of long-term treasury bond bonds, which focused investors' attention on risks. The benchmark 10-year treasury bond bond yield climbed one percentage point to 5% in October, the highest level in 15 years.
At the same time, you can refer to the experience of the UK in the autumn of 2022. The tax cut plan of then Prime Minister Truss brought the British treasury bond market into a collapse. The surge in yields is so rapid that the central bank has to intervene to contain the risk of a complete financial crisis. The action of the "bond volunteers" forced the government to cancel the plan, and Truss also stepped down.
For the United States, the core position of the US dollar in international finance and its position as a major reserve currency reduces the likelihood of a similar collapse. It takes a lot of effort to shake investors' confidence in US treasury bond bonds as the ultimate safe asset. However, if this confidence really disappears, the weakening of the US dollar's position will be a watershed moment, and the United States will not only lose its financing channels, but also its global strength and reputation.