Threat of the US debt spiral

The country that once dominated the global economy is now grappling with a severe debt crisis.

- BY MANAS MUKUL BANDYOPAD-HYAY AND ABHISEK KARMAKAR

The United States, with a GDP of $28 trillion, is burdened by a debt of $36 trillion. This disparity between the country’s income and debt is not only unusual but also alarming. The sheer magnitude of this debt, exceeding the combined GDP of China, Japan, India, the UK, and Germany, has raised concerns about its potential impact on the global economy. The International Monetary Fund (IMF) has cautioned the US about its debt crisis, and major credit rating agencies have sounded alarm bells, sparking fears of another global economic downturn similar to the 2008 ‘Great Recession’.

The US Treasury Secretary has acknowledged that the government is running out of time to address the issue, as tax revenues are insufficient to manage the massive debt burden. Experts describe the situation as a late-cycle debt crisis, which could have catastrophic consequences for the global economy. The situation is considered direr than the aftermath of World War II, and the world is increasingly concerned about the impact of the crisis. The effects are likely to be felt globally, including in India, making it essential to understand causes and implications of this economic turmoil. We need to accept four harsh realities. The first reality is that the crisis in the United States is not just a spending problem; it is a generational spending disorder.

Just like a person earning $1,000 a month might buy $10,000 shoes and struggle to pay the EMIs, America spends between $800 billion to $1 trillion annually on its military, regardless of its financial capacity. This excessive spending on defense, peacekeeping, and global interventions has led to the current crisis. The federal budget deficit in the US has been increasing year after year, and the country is spending more on defense and global dominance.