“The US Debt Ceiling Debate: Implications for the Economy and Foreign Policy”

For now, it seems that no one wants to back down. President Joe Biden expects the US Congress to raise the debt ceiling without further demands. On the contrary, Republicans want Biden to promise a savings plan of 5 trillion dollars over ten years. Donald Trump and his supporters go even further. They don’t want to raise the ceiling at all, so that a possible crash will expose Biden’s inability to run the country.

No one doubts that eventually the American political scene will agree on raising the ceiling. The debt ceiling has been raised more than seventy times in the past. A possible collapse of the USA would cause a real tsunami in the economic world. And nobody wants that. US officials must deal with China’s geopolitical pressure. One of the many battlefields is also being waged at the level of currency. De-dollarization of the world is now one of the weapons against the US. Problems with US bonds would erode confidence in the dollar. Opponents of the dollar would have all the more reason to retreat from the currency. Pragmatism will eventually win out and the debt ceiling will be raised. The implications in foreign policy would be unimaginable. The American elections are approaching, and it is not certain whether the American Democrats would be able to clean up such great damage.

However, the discussion surrounding the increase in the US debt ceiling is also interesting for many other reasons than the imminent collapse of the US. The question of indebtedness, and especially the sustainability of public finances, have been the main evergreen political problems in the USA during the last twenty years. The only break was the covid-19 pandemic. During it, the debt was forgotten and the cash printers were opened to the full. Everything was being bailed out, big checks were being sent to companies and people. Now the bill will be paid and the hard sobering up is coming.

It is precisely the return to the classic problem of the balance of public finances that means the end of covid. It doesn’t matter if there was covid or not, now the debts have to be paid. Of course, they were here before covid. That’s why excuses about the pandemic won’t hold up. We are back to the point where covid left us, only the debts have swelled and their resolution will be even more painful than before.

Misfortune never comes alone. The issue of debt sustainability will be addressed across the globe as we experience a period of restrictive monetary policy. Today it is clear that everything will take much longer than expected. It has been speculated many times that the US economy is unable to sustain long-term rates higher than 2.5%, as we could see before covid. We now have rates at 5.25% on the dollar and the US labor market is still resisting.

Rates have been rising for practically a year. Over time, this growth will be reflected in the servicing of the national debt. Not immediately, because the state borrows continuously during the year and only a small part of the state debt is renewed. The increased costs of servicing the debt will be reflected gradually over time. In the US federal budget, the cost of the debt in 2021 was 352 billion dollars, in 2022 already 475 billion. This year, the psychological threshold of 500 billion will definitely be crossed. By the way, disapproval of the debt ceiling strengthens speculation about a potential crash, so the US has to borrow now at a higher interest rate. Debt sustainability will be a big topic in the coming months, not just in the US, but in Europe.

The chances that politicians will be able to make meaningful spending cuts without increasing the tax burden are very slim. The only chance to get out of the debt trap is growth caused by new technologies. I don’t want to speculate at this moment how relevant the new technologies are, but it is clear that for the next few years they will be represented mainly by electric mobility and artificial intelligence. In both disciplines, Europe lags behind the USA and China. The US debt ceiling reminds us of all this. Excuses for the past only take away our strength in the difficult times ahead.