Political risk heightened by increasing US interest burden
The rising burden of US interest is increasing political risks.
TroibNews 
Last Friday, the U.S. Treasury Department announced that the federal budget deficit reached $1.833 trillion for the fiscal year 2024, which concluded on September 30. This figure marks the highest deficit outside the COVID-19 era, driven by federal debt interest exceeding $1 trillion for the first time.
As reported by Reuters, the deficit of $1.833 trillion represents 6.4 percent of the U.S. GDP, an increase from the 6.2 percent recorded the previous year.
A significant factor in this increase is the historically high budget deficits that have led to a rise in the total outstanding debt over recent years. These deficits stem from unprecedented U.S. spending aimed at combating COVID-19, limitations on revenue due to the 2017 tax cuts, and continually rising costs for social security and Medicare. Additionally, rising interest rates resulting from inflation are noted as another crucial factor, according to Bloomberg.
Since World War II, the dollar has maintained dominance in international financial markets, solidifying America's status as the world's leading economic power. This status provides the U.S. with exceptional advantages not available to other nations, such as lower borrowing costs, the authority to impose broad sanctions on adversaries, and stability in exchange rates, which protects the value of its debt.
As highlighted in an article from the Bipartisan Policy Center by policy analyst Upamanyu Lahiri, the dollar plays a critical role in the global financial landscape, evident in its use in approximately 90 percent of international foreign exchange transactions, its hold on nearly 60 percent of foreign exchange reserves, and its representation in invoices for over half of international trade. However, the increasing national debt could threaten the dollar's global dominance and the U.S.'s leadership role on the international stage. This shift may lead to a reduction in the disproportionate benefits currently enjoyed by the United States, potentially resulting in slower economic growth, higher unemployment, and diminished equity wealth.
Lahiri further noted that a decline in the dollar's value could make U.S. companies less attractive to international credit and capital markets, complicating financing for new initiatives and expansions. Rising prices may also impact consumers and businesses reliant on imported goods.
Luan Wenlian, a researcher at the Chinese Academy of Social Sciences, emphasized that finance serves as a key mechanism for transferring the U.S. debt burden. To combat inflation, the Federal Reserve has persistently raised interest rates on the dollar, which has bolstered the dollar's value and depreciated the currencies of other nations—especially those in development—thereby increasing their debt-servicing costs. This dynamic prompts a significant outflow of these countries' dollar assets back to the United States. The Fed's interest rate hike policy has been in effect for over four years, contributing to restoring economic equilibrium and alleviating inflationary pressures. With the Federal Reserve now considering its first interest rate cut in more than four years, the anticipated depreciation of the dollar could introduce imported inflation to other countries and diminish their dollar-denominated reserves and holdings of U.S. debt.
Camille Lefevre for TROIB News
As reported by Reuters, the deficit of $1.833 trillion represents 6.4 percent of the U.S. GDP, an increase from the 6.2 percent recorded the previous year.
A significant factor in this increase is the historically high budget deficits that have led to a rise in the total outstanding debt over recent years. These deficits stem from unprecedented U.S. spending aimed at combating COVID-19, limitations on revenue due to the 2017 tax cuts, and continually rising costs for social security and Medicare. Additionally, rising interest rates resulting from inflation are noted as another crucial factor, according to Bloomberg.
Since World War II, the dollar has maintained dominance in international financial markets, solidifying America's status as the world's leading economic power. This status provides the U.S. with exceptional advantages not available to other nations, such as lower borrowing costs, the authority to impose broad sanctions on adversaries, and stability in exchange rates, which protects the value of its debt.
As highlighted in an article from the Bipartisan Policy Center by policy analyst Upamanyu Lahiri, the dollar plays a critical role in the global financial landscape, evident in its use in approximately 90 percent of international foreign exchange transactions, its hold on nearly 60 percent of foreign exchange reserves, and its representation in invoices for over half of international trade. However, the increasing national debt could threaten the dollar's global dominance and the U.S.'s leadership role on the international stage. This shift may lead to a reduction in the disproportionate benefits currently enjoyed by the United States, potentially resulting in slower economic growth, higher unemployment, and diminished equity wealth.
Lahiri further noted that a decline in the dollar's value could make U.S. companies less attractive to international credit and capital markets, complicating financing for new initiatives and expansions. Rising prices may also impact consumers and businesses reliant on imported goods.
Luan Wenlian, a researcher at the Chinese Academy of Social Sciences, emphasized that finance serves as a key mechanism for transferring the U.S. debt burden. To combat inflation, the Federal Reserve has persistently raised interest rates on the dollar, which has bolstered the dollar's value and depreciated the currencies of other nations—especially those in development—thereby increasing their debt-servicing costs. This dynamic prompts a significant outflow of these countries' dollar assets back to the United States. The Fed's interest rate hike policy has been in effect for over four years, contributing to restoring economic equilibrium and alleviating inflationary pressures. With the Federal Reserve now considering its first interest rate cut in more than four years, the anticipated depreciation of the dollar could introduce imported inflation to other countries and diminish their dollar-denominated reserves and holdings of U.S. debt.
Camille Lefevre for TROIB News
