USA Public Debt Crisis: Is the Financial World on the Brink of an Abyss?

In recent months, discussions about the size of the U.S. public debt have once again made headlines. Surpassing the $35 trillion mark in July 2024 marks a critical point for the global economy and raises an important question: does the U.S. public debt pose a threat to global financial stability?

To understand the scale of the problem, simple math is enough. Each American owes about $100,000, and the U.S. public debt exceeds 120% of the country’s annual gross domestic product (GDP). This means that even if every citizen worked all year and used all their earnings to pay off the debt, they still wouldn’t be able to do so.

Where did this colossal debt come from?

The history of U.S. public debt growth is a story of quick decisions that seemed right at the time. Infrastructure, social programs, military spending—money was needed everywhere, and the federal budget systematically exceeded revenue. In recent years, especially after economic crises, the U.S. government has resorted to massive borrowing, taking advantage of low interest rates and global demand for U.S. Treasury bonds.

Why do investors worldwide eagerly buy U.S. debt securities? The answer is simple—America’s economic strength, a stable financial system, and the dollar’s status as an international reserve currency have traditionally made U.S. bonds relatively low-risk investments. However, as debt grows, this trust is being tested.

China holds $771 billion in U.S. public debt

Although representing only about 2% of the total U.S. public debt, Chinese holders—amounting to $771 billion as of April 2024—have a much greater influence on markets than the number suggests. As global suspicion toward dollar hegemony increases, China’s position as the second-largest foreign holder of U.S. Treasury securities puts Beijing in a unique bargaining position.

A scenario where China massively sells off U.S. debt on the markets would be disastrous for many economic actors. A sudden increase in the supply of debt securities would lead to falling prices, while Treasury bond yields would rise. The U.S. government would have to pay higher interest on its obligations, further straining the budget. However, China understands that such a move would be equally destructive for itself—dollars, on which its foreign reserves depend, would lose value, reducing Beijing’s wealth.

Chain reactions in global markets

The key issue is not just the sale of debt but its impact on the entire architecture of global finance. U.S. debt securities are a cornerstone of the world financial system. A crisis in this market would automatically spread to other sectors—currencies of other countries would fluctuate, investors would panic, and global trade could be disrupted.

A financial expert notes that past crises—such as Latin America’s “lost decade,” the Southeast Asian financial crisis, and recent turmoil in Argentina and Turkey—show how deep the effects of financial shocks can be. The U.S., leveraging its economic influence, has repeatedly shifted its problems onto weaker countries.

Dedollarization—more than just a scare tactic, it’s reality

The more fundamental threat to the dollar-based financial system does not come from individual transactions but from the deliberate moves by many countries to reduce dependence on the U.S. currency. As of July 2024, nearly half of the world’s countries have begun dedollarization processes.

Alternative settlement systems are expanding. BRICS nations are working on creating a new financial mechanism to bypass the traditional dominance of the dollar in international transfers. China is actively promoting the internationalization of the yuan, aiming to establish it as an alternative to the dollar. Developed countries, seeing the injustices behind the dollar’s monopoly, are also exploring ways to reduce this dependence.

However, dedollarization is a long-term process. The dollar’s position in global reserves and trade systems is so deeply rooted that it won’t disappear overnight. Nonetheless, the direction of change is clear: the world is gradually building financial structures independent of the American system.

What does this mean for ordinary people?

The question ordinary citizens ask is: what does this mean for my family? In the short term, markets may experience fluctuations—higher interest rates, uncertainty in stock markets, currency swings. But in the long run, reducing reliance on the dollar could bring more benefits than harm. The current system allows the U.S. to shift its economic problems onto the rest of the world through exported inflation via the reserve currency.

Medium-term challenges may be real—governments might face higher taxes, cuts to social programs, or tighter fiscal policies. However, a more equitable international financial order could lead to greater autonomy for developing countries and better conditions for global stability.

China’s role as a global actor

For China, holding $771 billion in U.S. public debt is like playing a multi-layered game. On one hand, it’s a bargaining chip in international negotiations—Beijing has influence over U.S. financial decisions. On the other hand, knowing the shared interest in maintaining the stability of the global financial system, China is more likely to hold onto these securities rather than sell them abruptly.

China’s role in dedollarization is more significant than just selling bonds. As the largest developing economy, China can steer the evolution of the global financial system. Every move by Beijing influences other emerging economies, creating potential for real change in the architecture of global finance.

Summary: A new order on the horizon

The U.S. public debt, now exceeding $35 trillion, is a symptom of deeper changes occurring in the global financial system. It does not pose an immediate risk of collapse—America can service its obligations—but it gradually undermines trust in the dollar as the world’s sole currency.

The dedollarization process has already begun and will be difficult to stop. The world is in a transitional phase, where the old order based on dollar hegemony is giving way to a more diversified system. This entails both risks—due to transitional instability—and opportunities for countries that learn to operate in this new reality.

In the short term, U.S. public debt will challenge both Washington and global markets. But over the next decade, systemic change could benefit most countries and contribute to more sustainable global economic development. The future of the world’s financial system will be shaped not only by U.S. decisions but also by collective efforts of countries working toward building alternative systems.