Anthony Rowley

Macroscope | What will happen when the US’ soaring debt runs up against its inflation fight?

Doubts about the US government’s ability to manage its debt without stoking inflation are sparking the latest round of dire warnings about the risks to the global economy

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A billboard showing the debt limit is seen in Washington, DC on April 17 last year. If, as some scholars say, the US government can always finance its budget deficit, it must still ensure its fiscal and monetary policies serve its objectives. Photo: AFP

Anthony Rowley

Published: 4:30pm, 29 Jun 2024

Global financial crises sometimes seem to come out of nowhere. There is no obvious catalysing event like the collapse of a financial institution, just a frisson of market fear that grows until it accelerates into a panic. That is in the air now.

We have become accustomed to dire warnings about the steep escalation of US government debt, yet, still, the debt goes on growing and the world doesn’t come to an end. But this time really is different in ways that could turn distress into disaster.

The US government debt crunch has migrated into the short-term end of the market, where crisis can come about more quickly, than at the long end. It’s hard to see how borrowing can be shifted back again without stoking inflation, which is the last thing the US leadership wants.

The Wall Street Journal, The Washington Post and the Financial Times, among others, have all turned their focus to the government debt issue in recent days, and not just because a presidential election is approaching. Fears run deeper than that.

Most explicit was the Financial Times’ front-page lead of June 22 warning of a “US borrowing binge”. The article noted that the United States “will be forced to fund a massive increase in its budget deficit with short-term debt,” with consequences for money markets and inflation.

“We are spending money as a country like a drunken sailor on shore for the weekend,” it quoted Ajay Rajadhyaksha, global chair of research at Barclays, as saying. That is precisely the kind of comment that plays into market fears, especially during a politically charged pre-election period.