Financial Warnings: A Look at Rising U.S. Debt and Market Implications
Throughout history, high levels of public debt have often led to financial crises, a trend documented in “This Time Is Different: Eight Hundred Years of Financial Folly" by Kenneth Rogoff and Carmen Reinhart. Despite these historical lessons, recent U.S. legislative actions have raised concerns about potential economic instability.
The recent passing of President Trump's “One Big Beautiful Bill” has sparked debate about its long-term economic impact. Designed to extend the 2017 Tax Cut and Jobs Act and eliminate specific taxes, this legislation also included spending cuts, primarily targeting Medicaid. However, these cuts have been deemed insufficient to balance the anticipated surge in public debt.
The Congressional Budget Office (CBO) has raised alarms regarding the country's financial trajectory. Before the legislation, the budget deficit had already reached 6.25% of GDP, a concerning figure given the near-full employment era. The CBO's forecasts suggest that if no policy corrections occur, the public debt could exceed post-World War II levels by 2035.
President Trump’s new budget initiative is expected to add $3.4 trillion to the deficit over the next decade, potentially pushing the public debt level to 124% of GDP by 2034. As a result, Moody's and other major credit rating agencies have downgraded America's AAA bond rating, reflecting growing financial apprehensions.
One particular concern is the country's dependence on foreign investors, who own a significant portion of the $29 trillion U.S. Treasury bonds. This reliance adds pressure on economic policymakers, especially as the administration's fiscal strategies provoke uncertainty among international investors.
The financial markets have begun to exhibit signs of stress. The U.S. dollar has depreciated by over 10% this year, marking its poorest first-half performance since 1973. This decline is unexpected, particularly with the imposition of import tariffs and favorable short-term interest rate differentials.
Moreover, despite a 100 basis point interest rate cut by the Federal Reserve since September, bond yields remain high. Concurrently, the price of gold has surged by over 25% since 2025, indicating diminishing confidence in the dollar among foreign investors.
These economic signals suggest the need for a strategic policy shift to prevent potential dollar and bond market turmoil. However, whether such adjustments will be implemented remains to be seen.
