Staff Reports
In a surprising turn of events that even the most seasoned economists didn’t see coming, the value of the dollar took a nosedive following a significant tariff announcement. Now, typically, when storms arise in the market, investors make a beeline for the safety of U.S. currency, causing the dollar to rise. But this time, it seems the dollar had other plans. Meanwhile, the U.S. national debt continues to balloon astronomically, and the scary reality of this situation has been underscored by a recent downgrade in the nation’s credit rating.
For the last two decades, Congress has been operating with a budget deficit, meaning it has been spending more than it brings in through tax revenue. In 2024 alone, the deficit has reached a staggering $1.8 trillion, joining a long line of previous deficits like a rather unfortunate parade. That means the total national debt is now at a jaw-dropping level—one that would make even the wealthiest person think twice about their credit card bills. It’s essential to look at this debt as a percentage of Gross Domestic Product (GDP), which shows a different story; the economy may be larger now, but that doesn’t mean it’s in the clear.
The argument often made is that debt can sometimes be necessary. During big recessions and crises, borrowing might be the best course of action to safeguard the economy. Borrowing encouraged during the pandemic seems to have been a wise choice in the short term. However, the truth is the U.S. has been accumulating massive amounts of debt even when the economy was not in crisis. This is how the country found itself in a position resembling global war-level debt—a tempting place to avoid.
Now, carrying around a large pile of debt comes with consequences. For starters, that money isn’t being used to invest in anything great; rather, it’s being funneled right into government payments. In 2024, interest payments on that towering national debt outpaced spending on the military and everything else. It’s alarming when one realizes that the U.S. is essentially borrowing to pay interest on its previous loans—an act comparable to opening a new credit card just to cover the bills on your old one! This kind of financial juggling is a slippery slope.
When investors feel skittish about the safety of their investments in the U.S. economy, they demand higher interest rates in return. This was precisely what happened when tariffs triggered fear, leading to a decline in the dollar’s value. This has a ripple effect; if U.S. Treasury securities—the safest investment in the world—start carrying higher interest rates, suddenly mortgages and even the coveted AAA-rated corporate bonds become more expensive too. It’s like a chain reaction of fiscal panic, and it seldom ends well for the average American.
So, what can be done to recover from this staggering national debt? Some policymakers believe the answer lies in boosting the economy and growing out of debt. They argue that if people have more money, the government will collect more in taxes, which should theoretically help reduce that debt-to-GDP ratio. However, many experts warn that this path is rather dubious, considering how enormous the debt is and that spending is also on a relentless rise. The thinly veiled solution remains the same: Congress needs to cut spending and increase revenues. Until then, the debt remains a shadow hanging over the economy, and any sudden dip in confidence can send the entire financial framework tumbling down.
