Just as Americans used credit cards, took out high-value loans, and applied for huge mortgages during the pandemic, the U.S. government did the same with its COVID-19 stimulus package. The potential ramifications of that accident were never considered.
But the recent outcry over public debt suggests the United States could become a little more frugal, and perhaps a little more European.
panic in usa
In the United States, major voices in the financial world, from Jamie Dimon to Jerome Powell, are sounding the alarm over massive public debt.
Since the start of the COVID-19 pandemic, the U.S. government has been debt-crazed, with President Trump's $2.2 trillion coronavirus economic stimulus package and President Joe Biden's Inflation Control Act putting the nation at risk. Debt levels have risen to an all-time high.
At the latest count, the U.S. debt-to-GDP ratio stood at 121%. The staggering $33.1 trillion figure means every American carries $100,000 worth of debt.
As interest rates rise, analysts are beginning to fear the unfamiliar high numbers. black swan Author Nassim Nicholas Taleb, who accurately predicted the 2008 financial crisis, worries that debt could cause a more predictable crisis for the U.S. government.
JPMorgan CEO Jamie Dimon said the U.S. needs to address its debt levels before foreign U.S. debt holders “revolt”, while Fed Chair Powell said the U.S. He said it was time for people to have “adult conversations” about debt levels.
When did the United States, a country with rich finances and free flow of credit, become a more common idea on the other side of the Atlantic?
debt avoidance
Major policymakers and think tanks are blathering about debt in ways that would have seemed hysterical just a few years ago.
Before and in the early days of the COVID-19 pandemic, historically low interest rates effectively provided governments with free money.
In the United States, this was a combination of historical factors such as a strong dollar, strong economic growth engines, and a consistent demand for government bonds to assure policymakers that debts could be repaid at any time. However, the situation is not as rosy as it once was.
That comes as most countries grapple with massive public spending lashings during the pandemic, followed by the challenge of paying it back amid rising interest rates to avoid high levels of inflation for a generation. This is because we are facing it.
Indeed, in early April, the International Monetary Fund (IMF) sent a warning to the UK about its debt situation, calling the UK and Italy “the need to take policy action to address fundamental imbalances in spending and revenue.'' “They are two of the four largest economies,” he said. ”
Meanwhile, with the growing influence of the BRICS bloc, which consists of Brazil, Russia, India, China, and South Africa, a genuine competitor to the US dollar has emerged, increasing the possibility of “de-dollarization.''
These pressures are forcing the United States into uncomfortable conversations about its relationship with debt.
cultural change
But it could also mark an unexpected cultural shift in the perception of U.S. debt. And that change in perspective could cause Americans to become more and more like Europeans.
Americans have generally become more resistant to debt, at least privately. In 2021, more than two-thirds of people in the country owned a credit card, compared to around 38% of people in France.
However, since the onset of the financial crisis, this trend has been reversing.
In the United States, private debt as a percentage of GDP fell from 99% in 2007 to 74% in 2022, according to data from the International Monetary Fund.
Meanwhile, France's private debt rose from about 46% to 68% over the same period.
Some European governments have historically taken a more hawkish stance on private and public debt levels.
Germany, for example, has constitutional fiscal rules that limit budget deficits to 0.35% of annual GDP, which can be extended in times of economic downturn. This rule has been enough to kill projects in the past. Eurozone countries also adhere to stricter debt rules.
Citizens across the continent are also becoming more cautious about managing their personal finances.
“This is a problem not only with public debt, but also with private debt. They don't like to borrow money,” said Zareh Asatrian, corporate director of the corporate taxation and fiscal research department at the Leibniz Center for European Economic Research (ZEW). He spoke about the Germans.
“For example, if you look at the availability of mortgages, only half of Germans own an apartment. They prefer not to take out a mortgage or buy an apartment.”
A 2015 Pew study found that there has also been a generational shift in Americans' perceptions of debt. The survey showed that 70% of baby boomers view loans and credit cards as increasing opportunities, while 60% of millennials think the same way.
“They experienced the depths of the Great Recession. Millennials came of age during that time and learned that high levels of debt took a toll on households’ immediate financial security, leaving them unable to save enough for the future. “And Gen X endured the loss of home equity and other impacts of the recession at higher rates than many other Americans,” the researchers wrote at the time.
french exit
According to ZEW's Asatrian, there is one key area where the US continues to diverge from Europe, meaning the fight over debt is less urgent: economic growth.
According to the IMF, the US economy is expected to grow 2.7% this year.
But it doesn't seem to be enough to wipe out the debt. The country's deficit soared to 5.7% of GDP in 2023, a change that may be the main reason for the recent uproar among analysts. In early April, the IMF called on the United States to urgently address this deficit.
This is even higher than in France, where panic over the country's debt situation is heating up.
France has been in the spotlight in recent months, with economic growth at just 0.8% and a budget deficit set to widen to 5.5% in 2023.
Economists at ING said the renewed focus on France's alarming debt situation marks the culmination of an “astonishing turn of events”, all of which are bad news for the country.
Global rating agencies Moody's and Fitch were scheduled to release updated guidance on French debt on Friday.
“In the end, 2023 was synonymous with a marked deterioration in public finances. Although all official statistics are not yet published, France will be one of the worst-financed countries in the EU,” ING said. wrote.
The latter had already downgraded France to AA- last November, citing its high level of government debt as a particular weakness.
The renewed panic over U.S. debt could mark the culmination of a long-term upturn in the way Americans approach debt, at both the micro and macro levels.
France's current woes may be reason enough for the country to raise such concerns, as investors contemplate pouring money into the country.