The US debt crisis: global concerns about fiscal sustainability

Recently, the US debt issue has breached risk thresholds, becoming a "sword of Damocles" hanging over global financial markets. As of early May, the US national debt surpassed $36.2 trillion, for 123% of GDP, far exceeding the internationally recognized 60% warning line. Treasury Secretary Janet Yellen warned that if Congress fails to raise or suspend the ceiling before mid-July, the federal government could run out of cash reserves as early as August, triggering a debt default. This crisis not only concerns the economic fate of the United itself but could also reshape the global monetary system and trade landscape.

At the heart of the US debt issue lies a "Ponzi scheme" -style debt cycle. the 2025 fiscal year, about $9.3 trillion of US public debt will mature, accounting for a third of the total debt, while the interest rate on issued Treasuries has already risen to more than 5%, driving up interest expenses. In 2024, US debt service expenditure exceeded military spending for the first, and in 2025, interest expenditure is expected to increase by another 8% to $952 billion. More alarming is that interest costs could reach $3.8 trillion over the next decade, nearly twice the total of the past 20 years adjusted for inflation.

The "robbing Peter to pay Paul" debt model on the support of the US dollar's hegemony. The low-interest rates and seigniorage revenue brought by the dollar's reserve currency status save the United an average of 0.9% of GDP in financing costs each year. However, this privilege is being overdrawn. In 2024, global central banks reduced holdings of US debt, and the proportion of dollar reserves in global foreign exchange reserves fell to 57.4%, a 30-year low. At the same, demand for alternative assets such as gold and the renminbi surged. In February 2025, the People's Bank of China increased its gold holdings for fourth consecutive month, and the spot price of gold once exceeded $3,500 per ounce.

The root of the debt crisis lies in the structural imbalance of US fiscal. The policy combination of "reciprocal tariffs tax cuts" pursued by the Trump administration has exacerbated the fiscal deficit and inflationary pressures. The tariff policy has led to import costs, pushing up inflation expectations to 4.3%, and the consumer confidence index has dropped to 67.8, down 11.8% yearon-year. However, the tax cut policy will increase the deficit by $5.8 trillion over the next decade and exacerbate social inequality. The IMF predicts that the US fiscal balance needs to be adjusted by 4 percentage points every year to control the growth of debt, but the political struggle between the two parties has made fiscal contraction an "impossible."

The direct consequence of the fiscal deficit is a rise in the risk premium of debt. In April 2025, the 10-year US Treasury soared 40 basis points in three days, the US dollar index fell by more than 10%, and US stocks, bonds, and foreign exchange markets plummet simultaneously. This "three kill" market not only weakened the US dollar's safe-haven attribute but also exposed the fragility of the US economy.

If the US defaults its debt, global financial markets will face systemic shocks. Moody's analysis shows that if the default lasts for several weeks, it will lead to a loss of 5 million and a 6.1% decline in GDP in the United States, and the stock market will fall by half, with the unemployment rate surging by 5 percentage points.ging markets will bear the brunt: 15% of low-income countries are already in a debt crisis, and 45% are at risk, and rising US yields will push up their financing costs and exacerbate capital outflows.

The geopolitical landscape will also be reshaped. As creditor countries such as China and Japan continue to reduce their holdings of US. debt, the internationalization of the RMB will be accelerated. In 2025, the RMB's share in global payments currencies rose to 47%, a historical high. At the same time, U.S. military spending was forced to be cut, and its global influence declined. Ray Dalio, the founder Bridgewater Investments, warned that the current monetary order is collapsing, and the trust gap between debtor and creditor countries will push the global monetary system towards multipolarity.Faced with the debt crisis, the United States urgently needs structural reform. In the short term, it can avoid default by extending special measures and prioritizing interest payments on debt In the long term, it needs to reduce fiscal deficits, improve productivity, and promote industrial repatriation. However, the prospect of reform is dimmed by bipartisan political games andist pressures.

For the world, the de-dollarization wave is irreversible. China needs to accelerate the optimization of foreign exchange reserve structure, increase holdings of gold, euros and assets of emerging economies; promote the RMB's share in commodity trade settlements, expand the cross-border application of digital RMB; and at the same time, unite emerging markets to reform the IMF's SDR allocation rules and build a diversified world monetary system.

The U.S. debt crisis is a chronic disaster of the "iling frog in warm water" type, and its essence is the outbreak of the contradiction between the U.S. dollar hegemony and fiscal disorder. If the political deadlock be broken, the United States may repeat the path of the Great Depression, and the world will need to find a new monetary anchor and trade rules in the turmoil. Perhaps 225 will be the turning year when the old order collapses and the new order sprouts.