The public debt of the U.S. has now surpassed $36.2 trillion, causing many experts and credit organizations to worry that the economy will not be able to grow fast enough to bear the costs of repaying debt and rising interest rates. Moody's recently downgraded America's credit rating from the highest level Aaa to Aa1, arguing that the strong financial-economic factors of the U.S. are no longer sufficient to offset the level of fiscal deterioration.
According to expert Jim Reid from Deutsche Bank, the U.S. financial system is gradually 'bleeding' in a way that is 'dying by a thousand cuts' – meaning that small segments of the fiscal system are continuously being harmed. While losing the highest credit rating may not have immediate consequences, it silently erodes long-term confidence in America's ability to repay debt.
The Trump administration has made several statements aimed at addressing the public debt issue, such as the 'gold card' visa initiative to generate revenue or expanding tax cut programs. The 'big, beautiful bill' they are pushing includes extending the tax cut provisions from 2017 and tax exemptions for tips and overtime income. The government believes this will stimulate GDP growth in both the short and long term, helping to improve the public debt-to-GDP ratio.
However, the Congressional Budget Office (CBO) warns otherwise: without fiscal policy adjustments, tax cuts will lead to a significant drop in budget revenue, and public debt could rise to 220% of GDP by 2055, 63 percentage points higher than the baseline forecast.
In the worst-case scenario where the U.S. bond market loses confidence, the Federal Reserve (Fed) could intervene through quantitative easing (QE) – a measure of printing additional money to buy bonds, keeping long-term interest rates low, helping the government continue borrowing at lower costs.
Although the bond market has reacted relatively calmly to Moody's actions, expert Mark Haefele from UBS believes that if serious volatility arises, the Fed will certainly act to stabilize the system.
