The size of the national debt of the United States reached $ 33.04 trillion - the highest level on record. This is evidenced by the materials of the US Treasury Department published on the night of September 19.
To clarify, the U.S. national debt is the total debt of the federal government to creditors. Washington borrows money to pay for the bare necessities - these expenses can no longer be covered with the help of budget revenues.
To do this, the country's authorities mainly use special treasury bonds (treasuries). American and foreign investors buy securities issued by the US Treasury and receive a stable income on them, in fact, lending their money to the US economy. These funds are used to pay off the budget deficit.
According to the Federal Reserve Bank of St. Louis, spending by the U.S. treasury has consistently exceeded the amount of cash receipts since 2002. During the same time, the US national debt has increased fivefold, and today its volume is equivalent to 121% of GDP, that is, almost a quarter of the size of the country's economy.
"The US national debt is growing at a rapid pace, mainly due to a significant increase in government spending while reducing tax revenues. This leads to a budget deficit, which is financed by loans. In the past few years, a key factor has been a sharp increase in spending money to combat the consequences of the COVID-19 pandemic and help Ukraine, "Vladislav Antonov, a financial analyst at BitRiver, explained to RT.
Unlimited tariff
It is noteworthy that back in 1917, the US authorities introduced the so-called debt ceiling. We are talking about an artificial restriction, which was originally created to protect the country from excessive growth of borrowing.
At the same time, against the backdrop of constantly growing budget expenditures, the country's leadership periodically has to either raise the limit or completely abandon its use. According to Congress, since World War II, the United States has changed the debt ceiling more than 100 times. Moreover, the discussion of this issue is often accompanied by heated debates, and delaying the process each time pushes the country to default, experts say.
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So, at the beginning of 2023, the US national debt reached the maximum permissible bar at that time - $31.4 trillion. As a result, Washington began to run out of money to fulfill its own obligations, and the Ministry of Finance warned of the threat of default.
It was assumed that the US government would have nothing to pay off creditors in early June. For several months, the authorities could not agree on changing the debt ceiling, but just a few days before the critical level, they still compromised. The country's leadership has decided to suspend the limit until January 1, 2025, and then raise it again.
"In fact, the country's authorities have postponed the solution of the problem and in the next year and a half they will be able to continue to deepen this debt hole without restrictions. However, in general, the situation is clearly deteriorating and it is unlikely that the United States will be able to straighten out the budget in the foreseeable future, "said Artem Deev, head of the analytical department at AMarkets, in an interview with RT.
Although the United States once again managed to avoid default, the current state of affairs alerted participants in the global financial market. Against this background, in early August, the international agency Fitch downgraded the long-term rating of the United States from the maximum level of AAA to AA+. This happened for the first time in 29 years.
"The rating of the United States has been downgraded due to the expected deterioration of the country's financial situation in the next three years, a high and growing debt burden, as well as a decline in the quality of public administration ... over the past 20 years, which has manifested itself in repeated arguments about the debt ceiling and last-minute decision-making on this issue," the organization explained.
Rate hikes
Among the main challenges for the United States, Fitch analysts in their report also called the continued growth of the budget deficit and the increase in interest rates in the country. So, against the backdrop of the current tightening of monetary policy (monetary policy) in the United States, servicing the public debt is becoming increasingly costly for Washington.
It should be noted that in 2022, after the introduction of energy sanctions against Russia, fuel prices rose sharply in the United States, and inflation accelerated at a record rate in 40 years. To combat price increases, the Federal Reserve System (acting as the country's central bank) began to raise the interest rate, although it had previously kept it near zero for several years.
In just the last year and a half, the Fed has raised the rate 11 times and brought it to 5.25-5.5% per annum. The last time a similar value could be observed was in March 2001.
Tightening monetary policy is considered one of the main tools in the fight against inflation. As a result of rising rates, the cost of loans for citizens and businesses is rising, economic activity is weakening, which puts pressure on prices. At the same time, due to the actions of the Fed, the yield of treasuries increases and, as a result, the service of the US national debt becomes more expensive.
According to the Congressional Budget Office, in 2022, the US government's spending on interest payments on public debt increased immediately by 35% and amounted to $476 billion, it is assumed that in 2023 the amount will increase by another third to $663 billion, and in 2033 it will exceed $1.4 trillion.
However, if inflation in the country continues to remain high, and the Fed raises the rate even more, servicing the national debt will begin to rise in price at a faster pace. Moreover, in the future, interest payments may become the largest item of expenditure of the US budget, which will be a serious challenge for Washington in the long term. This is stated in a study by the Peter Peterson Foundation (former US Secretary of Commerce).
"In the next 30 years, interest payments will amount to about $ 71 trillion, and by 2053 they will go to almost 35% of all federal budget revenues. Interest costs... in 2029 they will exceed the amount of defense spending, in 2046 - on Medicare (health insurance program for the elderly population. - RT), and in 2051 - on social insurance, "the organization calculated.
According to the fund, the need to service public debt will force the US government to cut public investment, which could ensure economic growth in the future. So, by 2053, the US authorities will spend almost three times more money on interest payments than they have ever spent on education, non-defense infrastructure development, research and development combined.
"In the future, the United States will face serious difficulties in the fiscal sphere. The country has significantly increased borrowing to respond to the COVID-19 pandemic, but the structural imbalance between expenditures and revenues that existed before is still large and will continue to grow rapidly. In addition, with the increase in interest rates and the increase in public debt, borrowing in the future will become even more expensive, "the authors of the report added.
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In the face of a deteriorating debt burden, the United States will probably have to take the path of more "aggressive cuts" in budget spending, as well as raise corporate tax rates. This point of view was expressed in an interview with RT by Mikhail Stepanyan, stock market strategist at Freedom Finance Global.
"We believe that in 2025 the United States may face a difficult negotiation process. After all, by this time, not only the suspension of the debt ceiling expires, but also the validity of tax incentives for business, adopted by the Republicans in 2017, "Stepanyan added.
Toxic asset
According to Vladislav Antonov, the record increase in the public debt of the United States and the increase in the cost of servicing it undermine confidence in the government of the country. Against this background, more and more states are beginning to think about the advisability of storing their money in US Treasury securities.
For example, China has already withdrawn more than $240 billion from the US national debt over the past two years, as a result, according to recent data from the US Treasury, by the beginning of August 2023, Beijing reduced its investments in treasuries to 821.8 billion - the lowest level in 14 years.
It is noteworthy that in 2018, China kept more than $ 1.1 trillion in US government bonds and was the largest holder of US government debt, but already in 2019 it lost this place to Japan. At that moment, Beijing began to reduce investments in treasury securities against the backdrop of the unfolding trade war with Washington. After that, the Asian republic paused, but already in 2022 resumed the sale of treasuries.
"The reduction in investments in the US national debt by China is due to Beijing's attempts to diversify reserve assets. This is partly due to concerns about the prospects for the dollar against the backdrop of the high national debt of the United States, as well as the freezing by Western countries of Russia's gold and foreign exchange reserves, "explained Vladislav Antonov.
After the start of a special military operation in Ukraine in February 2022, the West has already imposed almost 15 thousand different restrictions against Moscow. In addition to the energy industry, the restrictions affected trade, aviation, the banking sector, as well as gold and foreign exchange reserves (gold reserves) of the Russian Federation.
The Russian authorities were able to partially prepare for such a scenario: over the past few years, Moscow has almost completely withdrawn its money from the US national debt. If at the end of 2017 the Russian Federation was one of the largest creditors of the United States and held more than $102 billion in treasuries, then by the beginning of the imposition of sanctions in 2022, this figure was already about $2 billion, and now it is only $29 million.
Nevertheless, Western states, primarily European ones, managed to block about half of Russian gold reserves for about $ 300 billion. These events could be an occasion for China and other countries to begin to gradually shift their money from American securities to other assets.
"I think a number of countries, primarily BRICS, will continue to sell US bonds. However, it is necessary to dump treasuries gradually in order to completely pull your money out of the States and not bring down the market, "Vladislav Antonov suggested.
Washington, in turn, will not be easy to find alternative creditors, said Russian businessman Oleg Deripaska. Moreover, in his opinion, the main allies of the United States in the person of Japan and Europe are also unlikely to be able to increase investments in treasuries due to internal economic problems.
"Economists have already openly begun to say that demand for US Treasury bonds will fall ... And the United States is less and less likely to refinance without consequences. At the very least, a recession is indispensable. And, apparently, Biden does not have a second term," Deripaska wrote in his Telegram channel.