The U.S. Treasury Department announced last Friday that the federal budget deficit for the 2024 fiscal year reached a staggering $1.833 trillion, marking the highest deficit outside the COVID-19 era. This surge is primarily driven by interest on federal debt surpassing $1 trillion for the first time.
According to a Reuters report, the $1.833 trillion deficit accounts for 6.4 percent of the U.S. GDP, up from 6.2 percent the previous year. Historically high budget deficits have led to a significant increase in the overall debt outstanding, exacerbated by unprecedented spending to combat COVID-19, revenue limitations from the 2017 tax cuts, and rising costs in social security and Medicare. Additionally, inflation-induced interest rate hikes have further contributed to this growth, as highlighted by Bloomberg.
The U.S. dollar has long dominated international financial markets, maintaining America's position as the world's leading economy. This dominance provides the United States with unique advantages, including lower borrowing costs, the ability to impose broad sanctions, and stability in debt value due to minimal exchange rate fluctuations.
However, an article from the Bipartisan Policy Center by policy analyst Upamanyu Lahiri suggests that the escalating national debt could undermine the dollar's global supremacy. With the dollar used in approximately 90 percent of international foreign exchange transactions, nearly 60 percent of global foreign exchange reserves, and over half of international trade invoices, any decline in its value could diminish the United States' economic advantages. This shift might lead to slower economic growth, increased unemployment, and reduced equity wealth in the U.S.
Lahiri also points out that a weakening dollar could make American companies less attractive in international credit and capital markets, complicating the financing of new ventures and corporate expansions. Additionally, price increases may impact individuals and businesses reliant on imported goods.
Luan Wenlian, a researcher from the Chinese Academy of Social Sciences, emphasizes that the Federal Reserve's prolonged interest rate hikes have elevated the dollar's value, causing depreciation in other currencies, particularly in developing countries. This has led to increased debt-servicing costs and a significant outflow of dollar assets back to the United States. With the Federal Reserve signaling its first interest rate cut in over four years, the resulting depreciation of the dollar could introduce imported inflation into other economies and reduce their dollar reserves and U.S. debt assets.
As the U.S. navigates these economic challenges, the global community watches closely, recognizing that shifts in the U.S. economy and the dollar's standing can have far-reaching impacts worldwide.
Reference(s):
cgtn.com
