The Current State of the U.S. Foreign Debt

Abstract

In recent decades, the world economy is characterized by a constant increase in external debt of almost all countries of the world (the only exceptions are those countries to which investors and creditors have no confidence), which exacerbates the problem of world debt and the interdependence of creditor countries and debtor countries. The article is aimed at analyzing the current state of foreign debt of the United States as a country that still has an impeccable credit history and high credit ratings, and at the same time in many publications is considered as a potential threat to the whole world in case of default. During the studied period (70 years), the U.S. external debt has been constantly growing, and the trend analysis conducted in the work indicates that this growth will continue in the medium term. The U.S. foreign debt in absolute terms is the largest in the world, having almost doubled over the past 10 years. At the same time, among the countries that have the highest ratio of total public debt to GDP, the United States ranks only fifth, because the USA have the largest GDP in the world. Among the main reasons for such a significant public debt, analysts point out the world’s largest military budget, significant tax cuts in recent years and significant costs to overcome the consequences of COVID-19. Due to the high level of GDP, high credit ratings and the status of a reserve currency in the U.S. dollar, the U.S. government securities are attractive to investors. Central banks of other countries, pension, insurance and investment funds still have a sufficient level of confidence in the United States and invest financial resources in debt securities of the U.S. government. The prospects for the U.S. foreign debt depend on the ability of the Federal Reserve System (FRS) to find solutions to domestic problems, among which the most acute are rising inflation and reducing household spending. A U.S. default is considered extremely unlikely, but in case of its announcement, it would have serious consequences for the global economy, creating uncertainty not only for the U.S. economy, but also for global financial stability. A default on the U.S. external obligations would result in a downgrade of the U.S. credit rating, which would cause significant volatility in the global stock market, a drop in stock indices and an increase in the cost of borrowing, which, in turn, would significantly reduce the ability of businesses and households to obtain loans. The fall of the U.S. dollar, which will result from the announced default, will cause commodity prices, including oil, to rise, leading to higher inflation globally. There will also be problems with supply chains in international trade.