The Looming US Debt Crisis: A Ticking Time Bomb for the Global Economy

The Federal Reserve’s Inaction Could Spell Disaster as Bond Yields Soar

The United States is teetering on the edge of a financial abyss, with its national debt approaching $37 trillion and a new tax bill set to exacerbate an already ballooning deficit. Labelled the “big beautiful bill” by its proponents, this legislation could become the largest in dollar terms in US history, flooding markets with Treasury bonds that global investors may reject. Moody’s recent downgrade of the US credit rating from AAA to AA1, alongside 30-year bond yields reaching 18-year peaks, heralds a looming crisis. This opinion piece contends that the Federal Reserve’s reluctance to employ quantitative easing (QE), constrained by its inflation and employment mandates, could precipitate a severe economic downturn with global repercussions. Without decisive action, soaring bond yields threaten to strangle growth, leaving policymakers grappling with a crisis of their own making.

A Gathering Storm: Debt, Deficits, and Downgrades

The US national debt, nearing $37 trillion, imposes a crushing burden, with interest payments devouring 4.6% of GDP, the highest among developed nations. Yet, the budget deficit continues to widen, driven by the new tax bill, which will necessitate unprecedented Treasury issuance. This surge in debt coincides with a precarious moment: Moody’s downgrade signals investor unease, while 30-year bond yields are climbing to levels not seen since 2007. Higher yields, demanded by investors wary of profligate spending, set the benchmark for all interest rates, from mortgages to corporate loans, threatening to choke economic activity. The US is on a collision course with disaster, and the global economy is at risk.

Why Are Bond Yields Soaring?

Bond markets operate on a risk-reward calculus. When investors perceive a government as fiscally reckless, they demand higher interest rates to offset the risk of holding its debt. Unlike corporations, the US issues debt in its own currency, the dollar, which the Federal Reserve can theoretically print to alleviate pressures. However, the Fed’s current policy of quantitative tightening, selling Treasuries to reduce its balance sheet, has propelled yields upward, reminiscent of the inflationary crises of the 1970s. With the new tax bill poised to unleash a deluge of debt, global demand for US bonds may falter, driving yields higher and intensifying economic strain.

The Federal Reserve’s Conundrum

The Fed’s dual mandate, stable prices and maximum employment, limits its options. In 2008 and 2020, collapsing inflation during the financial crisis and pandemic justified QE, where the Fed printed dollars to purchase Treasuries, suppressing yields and stabilising markets. Today, inflation, though reduced from 9% in June 2022, remains above the Fed’s 2% target, with 5-year breakeven inflation rates steady above 2%. Unemployment, at 4.2%, falls within the Fed’s 4-5% full employment range. Neither mandate justifies QE, despite escalating bond yields. Acting now could undermine the Fed’s independence and erode investor trust, a risk it is keen to avoid.

The Price of Inaction

Without QE, elevated bond yields could devastate the US economy. Higher borrowing costs will burden homeowners, with mortgage rates already eroding affordability, and businesses, whose investment may stall. The 1970s offer a grim precedent: rising rates triggered recessions, marked by spiking unemployment. A similar fate today could see bond yields cripple growth, pushing unemployment above 5% and forcing a belated Fed response with QE. By then, the damage, job losses, corporate failures, and shattered consumer confidence, may be irreparable. The global economy, intertwined with the US, faces ripple effects, from disrupted trade to destabilised financial markets.

Quantitative Easing: A Dangerous Gambit

QE is the Fed’s hidden weapon, enabling it to print dollars to buy Treasuries, capping yields artificially. While not eliminating debt, it eases repayment pressures and bolsters growth. However, QE’s risks are profound: printing money could reignite inflation, particularly with expectations already elevated. It also distorts markets, potentially undermining faith in the Fed’s impartiality. The Fed’s current tightening reflects caution post-2020 inflation surge, but its hesitation leaves the economy exposed. Only a sharp unemployment spike or market crash might prompt action, likely too late to mitigate widespread harm.

A Call for Radical Reform

The US cannot indefinitely print its way out of this crisis. Structural reforms, curtailing deficit spending, revising tax policies, and restoring investor confidence, are imperative. Lawmakers must reconsider the “big beautiful bill’s” fiscal recklessness, acknowledging that markets will not absorb limitless debt without consequence. The Fed must balance its mandates with proactive steps, perhaps a limited QE to stabilise yields without flooding markets. Investors should prepare for turbulence, diversifying into assets like silver, up 10% recently, or resilient stocks such as Spotify or IBM, as bonds falter.

Final Thoughts: Navigating the Abyss

The US debt crisis is a ship hurtling towards catastrophe, with rising bond yields as the jagged rocks ahead. The Federal Reserve’s inaction, bound by its mandates, risks repeating the economic devastation of the 1970s. Policymakers must act with urgency, reining in deficits, overhauling fiscal policy, and using QE judiciously, to avert a downturn with global consequences. The “big beautiful bill” is a misnomer, a reckless wager imperilling stability. Investors and citizens must demand accountability, pressing leaders to steer clear of disaster before it’s too late. The clock is ticking, and the stakes are monumental.