Trump’s tax-cutting budget bill is expected to add at least $3 trillion (£2.2 trillion) to the US’s already eye-watering $37tn (£27tn) debt pile.
The growing debt pile leaves some to wonder whether there is a limit to how much the rest of the world will lend Uncle Sam.
Since the beginning of this year, the dollar has fallen 10% against the pound and 15% against the euro.
Trump’s new budget bill did cut some spending, but it also cut taxes more, and so the current political trajectory is going the other way.
The sensible way to look at debt is as a percentage of a country’s income.
three hours before.
Simon Jack.
Business editor for the BBC.
Long-sown doubts about the scope and sustainability of US borrowing from the rest of the world resurfaced as Donald Trump celebrated the passage of his Big Beautiful Budget Bill, as it was officially named, through Congress this week.
It is anticipated that Trump’s tax-cutting budget bill will increase the US’s already staggering $37 trillion (£27 trillion) debt load by at least $3 trillion (£2.2 trillion). Trump’s former ally Elon Musk is among the many people who have criticized the plan, calling it a “disgusting abomination”, among others.
Some people question whether the rest of the world will lend Uncle Sam as much money as he needs given the mounting debt.
The dollar’s decline and the higher interest rates that investors are requesting in order to lend money to America are recent manifestations of those concerns.
In order to cover the annual gap between its income and expenses, it must borrow this money.
Over the course of this year, the dollar has lost 10% versus the pound and 15% versus the euro.
Overall, US borrowing costs have remained stable, but the yield curve—the difference between interest rates paid on longer-term and shorter-term loans—has steepened, raising concerns about the long-term viability of US borrowing.
This is true even though the US has lowered interest rates more slowly than the UK and the EU, which would typically strengthen the dollar because investors can obtain higher interest rates on bank deposits under US policy.
Ray Dalio, the founder of the largest hedge fund in the world, thinks that US borrowing is at a turning point.
According to his projections, the United States will soon be spending $10 trillion annually on loan and interest repayments.
“I am certain that the financial situation of the [US] government is at a turning point because, if this is not addressed now, the debts will accumulate to a point where they cannot be handled without significant distress,” he states.
What might that trauma look like, then?
The first option involves either a significant increase in taxes or a drastic cutback in government spending.
Future problems could be avoided, according to Ray Dalio, if the budget deficit is soon reduced from its current 6% to 3%.
Although some spending was reduced by Trump’s new budget bill, taxes were also lowered, so the political trend is currently in the opposite direction.
Second, the US central bank could print more money and use it to purchase government debt, as was the case following the 2008 Great Financial Crisis.
Those who own assets, such as homes and stock, do far better than those who depend on the value of labor, but this can ultimately lead to inflation and inequality.
The third is a simple default for the United States. Unable to pay will not pay. The global financial system is based on the “full faith and credit of the US Treasury,” which would make the Great Financial Crisis seem insignificant.
“The cleanest soiled shirt.”.
What is the likelihood of any of this?
Fortunately, not very much at the moment.
But the explanations aren’t really all that consoling. There aren’t many alternatives to the dollar in the world, whether we like it or not.
Many people are attempting to reduce their dollar holdings, according to economist and former bond supremo Mohamed El-Erian, who told the BBC that “the dollar is overweight and the world knows it, which is why we have seen a rise in gold, the euro, and the pound, but it’s hard to move at scale so there’s really very few places to go.”.
“The dollar must be worn consistently, much like your cleanest, dirtiest shirt. “.
The future of the dollar and US government bonds, the global benchmark asset, are, however, the subject of intense debate.
The dollar’s state and the amount of US debt are “very much on [US Treasury] Secretary Bessent’s mind,” the governor of the Bank of England recently told the BBC. Although he is well aware of these problems and I don’t believe he undervalues them, I don’t believe the dollar is currently in grave danger. “.”.
$37 trillion in debt is an incomprehensible amount. It would take you 100,000 years to accumulate that much money if you saved a million dollars every day.
It makes sense to view debt as a percentage of a nation’s income. An estimated $25 trillion is generated annually by the US economy.
Even though its debt to income ratio is significantly higher than many others’, it is still lower than that of Italy or Japan, and it benefits from the most inventive and prosperous economy in the world.
William F. Rickenbacker discusses the dangers to the dollar’s position as the global reserve currency in his book Death of the Dollar, which I have at home. In 1968, it was composed. We no longer have Mr. Rickenbacker; the dollar does.
Its value and status, however, are not a result of divine right.
