The United States is struggling with a mountain of public debt that is reaching alarming levels in 2024. This dramatic rise raises serious concerns regarding the long-term viability of the US dollar as the dominant currency on the global financial stage.
A recent report by the US Congressional Budget Office has highlighted the exponential growth of the country’s government debt. This situation sets out significant challenges for the United States as its interest payments will start consuming an increasing portion of its budget government, further affecting its credit position.
Risk and Loss of Trust
On August 1st, 2023, Fitch downgraded the rating of the United States’ sovereign debt from 'AAA' to 'AA+', due to the government’s excessive borrowing. This indicates a loss of confidence in the United State’s fiscal stability. For its part, Moody's still maintains the highest rating for the US debt, but in November 2023 it changed its perspective from "Stable” to “Negative”. Hence the US government treasury bonds are starting to not be considered a safe store of value, like they historically used to be.
These changes adds to the growing concern over US debt, which now exceeds 34 trillion dollars, equal to more than 120% of its Gross Domestic Product (GDP), an unseen level since World War II.
Unsustainable Fiscal Policies
The United States’ debt soared after the widespread tax cuts implemented by Donald Trump in 2017 and the huge stimulus spending during the pandemic. The US Treasury already declared that the growth of the US debt is “unsustainable”. However, former President Trump has promised to renew the tax cuts, which expire next year, if he wins the next presidential election.
In the context of rising US debt and a weakening dollar, the question that now arises is whether the dollar, which has long been the pillar of the international monetary system, can maintain its stability, and therefore its position as international reserve currency.
International Mistrust
Confidence in the US dollar, which has historically been a safe haven currency during financial crises, might gradually be undermined due to these challenges. Lack of action to curb the growth of the debt and the fiscal imbalances could have detrimental consequences for the stability of this currency.
The recent initiatives by China, Russia and Saudi Arabia, among others, to carry out transactions in their own currencies are an example of the distrust in the dollar, simultaneous to geopolitical and economic fragmentation. Additionally, there is a gradual reduction of the dollar-denominated reserves by multiple countries, due to the fear of eventual future sanctions by the United States, such as those imposed on Russia in recent years, by which assets in dollars (worth more than three hundred billion dollars) were frozen.
As a result, the global dollar-denominated reserves held by countries around the world have decreased from 85% in 1970 to 58% of its total reserves at the end of 2023.
Little Favorable Perspectives
The United States’ debt, which has led the country to pay more than a trillion dollars per year only in interest, is already more than what it spends on defense. The evolution of this figure has been dizzying: it has doubled compared to 2021 when yearly interest payment amounted to 500,000 million dollars, rising to 873,000 million at the beginning of 2023, and reaching 1.1 trillion dollars at the beginning of 2024. This unstoppable growth represents the core of the deficit spiral in which the country has plunged deeper and deeper.
The absence of a sustainable fiscal policy could leave the United States vulnerable to market pressures as debt interest payments increase. Ultimately, the fate of the dollar and its role in the global economy will depend on the ability of the United States to effectively address this debt crisis and restore the confidence in its fiscal stability.
Although the dollar is backed by the economic power of the United States since it “temporarily” removed its gold backing in 1971, the rising debt raises questions about whether this support based on the confidence in the prosperity of the country will be enough to maintain its position as the world’s main reserve currency.
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