GT Voice: Debt Crisis Looms in US Amid 9/11 Reflection

Artwork: Chen Xia/GT

While the pullout from the war in Afghanistan has sparked a reflection on US military interventions around the world in the two decades since 9/11, the troubles are far from over and another, far worse crisis looms in the country as America’s wartime economy has already thrown the level of US debt down an unsustainable path.

The urgency of the US debt problem just entered a dangerous zone when US Treasury Secretary Janet Yellen warned on Wednesday that the United States could default on its debt in October if Congress does not raise or not suspend the debt ceiling. It would be the first time in history that the US could not meet its obligations, causing “irreparable harm” to the US economy and global financial markets.

While it’s no secret that US debt is on an unsustainable footing, it’s still surprising to know that a real debt crisis is looming. According to forecasts by the Congressional Budget Office, the country’s debt will rise nearly 40% from 2019 levels to reach $24.3 trillion in 2022. Even more worrisome is that the US debt growing much faster than the economy, indicating a growing deterioration of the situation. debt problem. Meanwhile, the IMF estimates that the US government’s public debt-to-GDP ratio will reach 109% in 2021, far exceeding the debt level of a healthy economy.

Although the war in Afghanistan, which has cost the United States more than $2 trillion since 2001, is considered one of the causes of the meteoric rise of the American debt problem, it should be noted that the withdrawal of troops is not enough to solve the debt problems.

Some might optimistically say that the debt burden could be eased once the economy manages a strong rebound from the damage caused by the pandemic and the government does not need to shell out additional COVID-19-related social benefits. . It might also be the mainstream thinking of many in the US government. Since the start of the global pandemic, the Federal Reserve has been trying to buy time for the US economic recovery by unleashing a flood of liquidity and using various financial tools to support US government spending.

Yet, given a series of major economic policy mistakes, the US economic recovery is progressing much slower than expected. The ineffective fight against COVID-19 and the still raging COVID-19 cases caused by the Delta variant, one of the main reasons for the record number of job openings in the United States in July, will continue to challenge its bumpy economic recovery.

Additionally, the US economy has not benefited from its trade war with China, but some politicians in Washington are still advocating further crackdowns on China and Chinese companies, disregarding the fact that an escalation in trade tensions will only hurt the US economy more than the prolonged Afghan occupation of the country.

Against this backdrop, the risks facing the US financial system are severe, as there is a limit to everything, including what remains in the Fed’s toolbox. As US debt risks mount, the United States has become the biggest source of uncertainty in the global post-pandemic recovery. If a US debt crisis erupts, it will take the global economy with it.

Global investors have begun to view US debt with anxiety. For example, Japan’s GPIF, the world’s largest pension fund, cut US government bonds and bills to 35% of its holdings of foreign debt in the 12 months to March, from 47%, according to a Bloomberg report.

Data from the US Treasury Department showed China’s holdings of US Treasuries fell to $1.062 billion in June, down $16.5 billion from the previous month. This is the fourth consecutive month that China has reduced its holdings of US Treasuries. If there is no sign of US debt risk easing, it is necessary for China to continue to reduce its holdings of US Treasuries to reduce risk exposure.

Robert P. Matthews