WHY THERE ARE CONCERNS ABOUT THE US ECONOMY

WHY THERE ARE CONCERNS ABOUT THE US ECONOMY

Given the football World Cup, Taylor Swift's wedding, and a 250th birthday, Americans would be excused for losing focus this summer.
However, there have been increasing indications of economic difficulties. They made headlines this week when the US national debt surpassed $40 trillion (£29.4 trillion), sparking worries both domestically and internationally.

 

HOW DID WE ARRIVE HERE?

According to Maya MacGuineas, president of the Committee for a Responsible Federal Budget, it took nearly 200 years for the US national debt to reach $1 trillion for the first time.
That 1981 milestone was seen as a warning. "At that time, President [Ronald] Reagan told the nation in a televised address, 'If we as a nation needed a warning, let that be it'," she stated.As we approach America's 250th year, we are spending more on debt interest alone."

 

Reaching the $40 trillion milestone was anticipated due to increases in public spending throughout the administrations of Joe Biden and Donald Trump, but it also represents a turning point.
Increased expenses for social programs and other expenditures have surpassed income, which has been compromised by tax cuts. Borrowing has escalated in response to disasters like the Covid epidemic and the 2008 financial crisis.

 

HOW AWFUL IS IT?

The US national debt was slightly less than $20 trillion at the start of Trump's first term as president in 2016. In the ten years following then, it has doubled.
The Congress Joint Economic Committee estimates that the amount is increasing by around $90,000 every second, or $7.8 billion every day.The level of interest rates has changed significantly during the past ten years, according to Eric Swanson, a professor of economics at the University of California and a former senior economist at the Federal Reserve.

 

"Long-term interest rates in the US are at multi-decade highs - part of that is concerns about inflation, but part of that is concerns about the extreme levels of US government borrowing."
In addition to investors' concerns about the size of the US debt, the bond market is demanding bigger returns since tech companies are vying with the government for investors' money by borrowing staggering amounts to spend on artificial intelligence.The funding of the deficit becomes more costly when interest rates rise, according to economist Mohamed A. El-Erian, a professor at the Wharton School.

 

According to El-Erian, interest payments on public debt have increased by 15% from the same time last year. They account for about 20% of tax income, which is "larger than defense," he continues.

 

DO I NEED TO WORRY?

According to the Congressional Budget Office, the US is very close to its $41.1 trillion debt maximum and is expected to reach over $64 trillion by 2036.
However, economists claim that the situation is not yet dire. According to El-Erian, the US has a "much longer runway to fiscally misbehave" than other nations since it has the largest economy in the world and the dollar serves as the global reserve currency.It's about to turn into a yellow light that flashes. "It's not a red light that flashes," he claims.

 

Other nations have had comparable or greater debt levels, according to Swanson.
Even though the US national debt is 126% of its GDP, it is less than that of other G7 countries like Italy and Japan.
However, Swanson cautions that investor interest in lending money to the US government through bond purchases is "diminishing," producing a "vicious" cycle that necessitates the government providing ever-higher yields to keep investors buying its debt.
Additionally, increased borrowing costs in the US invariably translate into higher borrowing costs in other nations. "What happens in the US never stays in the US," El-Erian asserts. EL-Erian address to BBC News 

 

According to Charlie Bean, an emeritus professor of economics at the London School of Economics, financial market upheaval could result from a fire sale of US bonds if the US debt to economy ratio reaches a specific threshold.He states, "There's probably a point, but we don't know where it is."It's not like there's a certain amount that we can say, "We're fine if we stay at 145 percent, but disaster will happen if it gets to 150 percent."

 

FOR AMERICANS, WHAT DOES THAT MEAN?

According to El-Erian, households will probably pay more for credit cards, auto loans, and mortgages as a result of the current circumstances, with those with lower incomes being most severely impacted.
Because greater borrowing costs for businesses are frequently transferred to consumers through higher prices, there is also a secondary impact on consumers.
Accordingly, the debt "finds its way to the pocketbooks of people one way or another," according to MacGuineas.

 

WHAT COMES NEXT?

According to the most recent data, the US economy has slowed recently, although it is still expanding very quickly.
This is significant because economic expansion results in increased tax revenue, which may be used to fund government initiatives or interest payments. El-Erian notes that the debt issue is alleviated with sufficient growth.
However, the US may need to consider other choices if growth is insufficient. These can involve austerity or changes to the tax and public expenditure systems. Restructuring debt is an additional choice.

 

The Treasury department intervened on Wednesday to buy back government debt, increasing demand for bonds and cutting borrowing rates. Thus far, the approach has been akin to financial engineering.
However, the effect was fleeting, as long-term borrowing costs increased again the next day.

 

The White House will want to appear to be making progress on the economy as the midterm elections draw near. Voters' #1 issue is affordability. However, El-Erian is skeptical that the administration is prepared to consider alternative choices because they are no longer attractive.Over the next two to three years, I don't see anything that will drastically reduce the deficit. Tax cuts are the main topic of discussion in politics.