The US’s blowout debt burden is one piece of a global problem, IMF warns

The US’s blowout debt burden is one piece of a global problem, IMF warns
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  • Runaway US debt levels at risks to global stability, the International Monetary Fund said in a report.
  • Spiking Treasury yields are associated with exchange rate turbulence and higher interest rates elsewhere.
  • The Congressional Budget Office projects debt-to-GDP levels to reach 116% by 2054.

Ballooning US debt will weigh on more than just Washington, as spiraling borrowing costs have the potential to distort the global economy, according to the International Monetary Fund.

In its latest Fiscal Monitor report, the fund expects US deficit to more than triple overspending levels in other advanced economies by 2025, projected to hit 7.1%.

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“Loose fiscal policy in the United States exerts upward pressure on global interest rates and the dollar,” Vitor Gaspar, director of the IMF’s fiscal affairs department, said in a related press briefing. “It pushes up funding costs in the rest of the world, thereby exacerbating existing fragilities and risks.”

Specifically, the report made reference to the impact that debt has on Treasury yields, as the government must increasingly offer higher returns in order to keep attracting buyers. 

But such large and sudden rate increases are often associated with exchange rate turbulence across global markets, while a 1 percentage point spike in US interest can lead to a ramp up in foreign long-term nominal rates.

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Markets have already gotten a taste of debt-related yield jumps, after a US credit downgrade sent 10- and 30-year rates surging above 5% in October

The IMF didn’t just raise flags on the US, but warned that China’s deficit and debt levels were concerning: “How these two economies manage their fiscal policies could therefore have profound effects on the global economy and pose significant risks,” the report warned.  

For its part, Washington has undergone “remarkably large fiscal slippages,” the IMF said, referencing falling taxes and a doubling in government spending between 2022 and 2023, despite strong growth.

If this trend continues, the Congressional Budget Office expects US debt to reach 116% of GDP by 2054, where it currently equaled 97% in 2023. Some analysts have called this unsustainable, and a path towards national default.

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Others have touted that solutions are straightforward, as long as political backing can be secured. That includes a bipartisan willingness to cut spending, as well as tax hikes across income levels. 

Read the original article on Business Insider

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