Background

The U.S. national debt surpassed $36 trillion for the first time in the nation’s history on Friday, according to new data released by the Treasury Department. The United States holds the most debt out of any other country, and it continues to grow rapidly. The debt has risen a staggering 122% since 2014 alone. Writer for the Plain Bagel Richard Coffin remarks that “it doesn’t take an economist to recognize that this is a pretty alarming trend.” In perspective, if the national debt were converted to a stack of $1 bills, it would reach the moon and back five times! These alarming statistics have naturally raised concerns that the U.S. could one day default on its debt, which would send shockwaves across the global market and devastate the U.S economy. This whitepaper provides a background and overview of rising concerns over the national debt, repercussions on global markets in the case of the U.S. defaults, and proposed solutions that have been brought up to get the U.S. back on a path of sustainability from a current “fiscal train wreck.”

Rising Concerns Over Debt

While the U.S. has historically never defaulted on its debt, it has come dangerously close to hitting its debt ceiling on several occasions. The debt ceiling is a limit on the total amount of allowable outstanding federal debt and was implemented during World War I to keep the U.S. government fiscally responsible. Since then, however, it’s been raised over 100 times, most recently this January. The Treasury Department has since been taking drastic measures to keep borrowing within its limit to avert the X-date–the day on which the U.S. government is unable to meet all its obligations in full and on time.

Since the 1980’s, the national debt has risen parabolically. The last surpluses for the U.S government came during fiscal years 1998-2001, at a time when President Bill Clinton worked with a Republican-controlled Congress on a bipartisan budget deal to cut the deficit. Both Democrat and Republican administrations have added significantly to the federal deficit and debt to achieve their respective policy visions. Obama’s Affordable Care and U.S Recovery and Reinvestment Act cost hundreds of billions of dollars each. Trump’s Tax Cuts and Jobs Act, defense spending, and costly COVID relief also soared the federal debt. The average national debt every U.S. citizen owes is $100,000, showing that the debt is not just an elusive figure on a screen but a scary reality to reckon with.

Domestic/Global Impacts of a U.S Default

The domestic effects of the U.S. defaulting on debt would be catastrophic. The U.S. bond market, used as the primary form of collateral in the global financial system, would become instantly unstable as interest rates would spike on U.S. bonds, which in turn would spike general interest rates for mortgages, credit cards, loans, government bonds, etc. This would trigger a recession as businesses, particularly those with contracts with the government, would have a hard time operating. The unemployment rate would sharply increase from 3.4% to 7%. This time, unlike during the Great Depression and COVID-19, the U.S. government with inadequate cash would be unable to aid consumers and businesses. Moody projects that a U.S. default would wipe out 6 million jobs and $15 trillion in wealth. Additionally, The U.S government’s credit rating would expectedly downgrade, making it harder to borrow money from abroad. As a result, the U.S. government would be left with no choice but to heavily reduce spending through cutting key programs in military, healthcare, Social Security, etc.

A default would also send shockwaves to global markets. As the famous saying goes, “When the U.S. sneezes, the rest of the world catches a cold.” Demand for volatile U.S. treasuries would sink as panicked investors would sell off their holdings. In turn, the U.S. dollar would crash and likely be abandoned as the world reserve currency, which would hurt global financial markets reliant on the dollar. According to the researchers at The Federal Reserve, between 1999 to 2019, U.S. dollars accounted for 96% percent of trade in the U. S, 74% in Asia, and 79% in Europe. A U.S. dollar crash would trigger a global recession as prices of global stocks go down, inflationary pressures rise, and foreign countries’ export revenues fall precipitously as U.S consumers’ purchasing power erodes and they buy fewer international products.

Inception of DOGE

President-elect Donald Trump has formally announced the creation of the Department of Government Efficiency, or DOGE, to be headed by billionaire Elon Musk and entrepreneur Vivek Ramaswamy. DOGE’s function is to balance the budget by eliminating wasteful government spending and eliminating $2 trillion from the national debt. While it is not exactly clear how Musk and Ramaswamy plan to do this, the general idea is to improve the efficiency of the U.Sn government by removing agencies that overlap with others in function. This is intended to reduce the running cost of the government and “slash and burn bureaucracy” according to Ramaswamy. While the effectiveness of Trump’s DOGE in achieving fiscal responsibility remains to be seen, the creation of such a program marks an unprecedented step of the executive branch taking sweeping measures to address the national debt problem.

Conclusion

The critical issue that the U.S. faces is not just the current debt it has but the unsustainable path at which it is heading. The Committee for a Responsible Federal Budget estimates that it would take nearly $8 trillion of budget cuts to keep the debt from growing faster than the economy over the long term. While ideas like inflating away the debt, implementing a national sales tax, and increasing legal immigration could theoretically work, the U.S.’s most realistic option would be to reduce its deficit by balancing the budget in the long term. At least for the next two years, it is up to a Republican-controlled Congress and White House to choose how much attention to heed to this crisis. It will be interesting to see how much debt on top of $36 trillion will be added in the next 4 years and if the country will be able to keep up any longer.

 
Written by Veer Agarwal

Veer Agarwal studies at Livingston High School in the United States. 

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