Over the past 60 years, US Congress has raised the debt ceiling 78 times. For most of this period, raising the debt ceiling was a non-event. But over the past decade or so every time the US government reaches its debt ceiling, a drama of global proportions unfolds. Republicans and Democrats blame each other for the looming government shutdown; pundits issue stern warnings of a financial meltdown resulting from default; equity markets fluctuate between hope and fear; and the US president cancels important international engagements in order to deal with the crisis.
When the largest economy and holder of the international reserve currency is on the brink of default, no country can remain indifferent. But make no mistake, this is political theater. US Congress and the administration know too well that shrinking the deficit requires increase in government revenues through taxation coupled with deep spending cuts. Both options are political anathemas. So the only solution is to kick the can down the road and continue the charade that Republicans and Democrats really care about the ballooning debt. They don’t. Republicans like to present themselves as “fiscal conservatives”, but their leading presidential candidate for 2024, Donald Trump, the self-proclaimed “king of debt”, added more trillions to the national debt in one term than other presidents added in two. Democrats are no better, however, clinging to a dubious economic philosophy known as “modern monetary theory “which holds that “deficits don’t matter”.This is why the debt ceiling drama always ends the same way: after weeks of brinkmanship and partisan bickering, a last-minute deal is reached to raise the debt ceiling, allowing the administration to re-indulge in overspending for two additional years.
The United States is addicted to debt. With its federal deficit persistently above $1 trillion a year, US debt is growing by leaps and bounds, nearing $32 trillion. Ten years ago, when former US president Barack Obama fought with Republicans to raise the debt ceiling, the debt stood at $16 trillion. In other words, it doubled in just 10 years. According to the Congressional Budget Office, at the current spending rate the debt is poised to surpass $46 trillion by 2033 which is almost half of today’s global GDP. Economic historian Niall Ferguson once said “if you really want to see when an empire is getting vulnerable, the big giveaway is when the costs of serving the debt exceed the cost of the defense budget”. The Congressional Budget Office projects that the interest rate on US debt will surpass $1.4 trillion, about the size of today’s federal deficit and almost twice today’s defense spending.
If any other country had been so reckless, its credit rating would have fallen like a rock. Not the US. The big three credit rating agencies – Moody’s, Standard and Poor’s and Fitch – together dominating more than 80 percent of the global market, are American. No matter how obscene the US debt level gets these agencies continue to rate US government bonds as “prime grade”. These rating agencies could be easily coerced if they step out of line and downgrade the very same government that regulates them. This biased grading misleads central bankers all over the world as well as pension funds, hedge funds and other institutional investors into buying more US debt. At what point will the music stop? It’s already slowing, it seems. With the de-dollarization concept becoming mainstream, central bankers are increasingly reluctant to over-expose themselves to dollar-denominated debt. In 2022, the total ownership of Treasury securities held by foreign countries fell by a quarter of a trillion dollars. The federal deficit for the same year reached $1.38 trillion.
The US administration needs to borrow more and more money, but the global appetite for US Treasuries is weakening. And that’s why the US administration must increasingly rely on its own public to finance the deficit. But to attract so much domestic money, the government would have to offer higher interest rates which could in turn send the economy into a recession. Debt addiction is not only a US problem. It is endemic to most developed countries. With the exception of Canada and Germany, other G7 countries that lectured recently in Hiroshima on the dangers of China’s so-called debt traps have debt greater than their GDP. Japan, the host of the G7 summit, has a debt-to-GDP ratio of 225 percent. Compare this to the five Central Asian countries, whose leaders attended the China-Central Asia Summit in Xi’an, Shaanxi province, around the same time. Their ratio is only 30 percent.
Rich countries can borrow as much money as they wish and provide their citizens with perks and entitlement programs people in developing countries can only dream of. Developing countries are forced to stabilize their currencies through the purchase of debt instruments denominated in rich economies’ currencies like the dollar or the euro. This facilitates the biggest transfer of wealth from the poor to the rich in history. This unjust system has run its course and a global financial reform is long overdue. But don’t count on Western politicians to take any action to avoid a financial meltdown one minute before they must. It is up to the Global South to draw the line and direct world attention to the mother of all debt traps – the G7’s out-of-control borrowing practices.
Sadly, if history is our guide, the only way major powers can deal with unsustainable debt levels is to embark on aggressive foreign policy, militarization and provocation and to instigate war against one or more of their major lenders, or – even better – pit them against each other, in the hope that post-war negotiations would result in debt cancellation, restructuring, asset seizure or reparations. Indeed, when it comes to unsustainable debt, war is the only realistic alternative to bankruptcy. Which is why the debt ceiling drama in Washington and the deteriorating US-China relations should be viewed as two scenes from the same plot.