What will happen if the US debt problem triggers global financial turmoil?

The national debt recently surpassed $36 trillion for the first time in history, an increase of nearly 6% since the beginning of the year, and the latest $1 trillion increase in less than four months. The data signals an accelerating pace of debt accumulation in the United States, with the Congressional Budget Office forecasting in its August report that the national debt will climb to more than 106% of gross domestic product (GDP) by 2027 and rise further to 122% by 2034. The International Monetary Fund has warned that high fiscal deficits and the continued increase in the US public debt to GDP ratio pose risks not only to the US itself, but also to the global economy. At a time when the global economy is closely intertwined, the U.S. debt problem is like a bomb that could detonate at any moment, and its ripples are spreading through complex financial networks to all corners of the world, creating layers of ripples.

From the perspective of financial risk theory, the continuous expansion of US national debt does have multiple potential risks, and will also bring complex and multi-faceted impacts. The first is the impact on financial markets. Treasurys have long been seen as a safe haven in global financial markets. U.S. Treasury bonds are an important benchmark for collateral and risk pricing in global financial markets. However, if the US debt problem erupts, investor confidence in US Treasuries could be severely damaged, leading to a large sell-off of US Treasuries, which in turn would trigger a fall in bond prices and a rise in yields. Such turmoil will not only affect the stability of the global bond market, but also may spread to other financial markets such as stocks and foreign exchange, resulting in overall instability of the global financial market. As the size of the national debt expands, global credit markets may be subject to volatility as investors may reassess risk and adjust their portfolios. A rapid increase in the size of the national debt could lead to fluctuations in the dollar's exchange rate. On the one hand, this may affect the export and import business of the United States; On the other hand, it could also trigger a realignment of the global monetary system. The growing size of the U.S. national debt could undermine global investor confidence in the U.S. economy. That could lead to capital outflows and stock market declines, sending shockwaves through global financial markets.

The second is the impact on the US domestic and global economy, with the expansion of the scale of national debt, the US government needs to pay interest expenses are also increasing. This not only puts pressure on government finances, but could also affect spending in other important areas, such as social security, health care and education. A rapid increase in the size of the national debt could cause market interest rates to rise, as investors may demand higher returns to compensate for higher risk. This would have a negative impact on the U.S. borrowing market, increasing borrowing costs for businesses and individuals. The expansion of the national debt adds to the uncertainty about the economic outlook. As a result, investors may become more cautious and reduce investment activity, affecting economic growth and job creation. As one of the world's largest economies, the expansion of the U.S. national debt could add to global economic uncertainty. This could affect economic policymaking and financial market stability in other countries. A crisis in U.S. debt could spread to other countries through trade, finance and investment channels, triggering a chain reaction in the global economy. This will have a negative impact on global economic recovery and growth.

The third is the impact on global credit markets, as growing doubts about the ability of the United States to repay its debts have prompted investors around the world to reduce their holdings of U.S. debt as a safe haven. This caused the price of US Treasuries to plummet, further exacerbating the severity of the US debt problem. As an important collateral and risk-pricing benchmark in the global financial system, fluctuations in the value of US Treasuries have triggered a series of chain reactions. Many dollar-denominated international loan contracts are under pressure to be reassessed and adjusted, and banks and financial institutions have raised the risk premium on US-related loans, which has made it significantly more expensive for US companies and governments to raise funding in international markets. Some emerging market countries and developing economies hold large amounts of US Treasuries as foreign exchange reserve assets and face the risk of asset impairment. This not only affects their balance of payments, but also puts their ability to borrow in international loan markets and their credit ratings under potential threat.

To sum up, the problems caused by the US debt problem have not only put pressure on the US domestic economy, but also brought uncertainty to global financial markets and the global economy. Therefore, policymakers need to pay close attention to the changes in the scale of national debt and take effective measures to deal with possible risks and challenges.