Economics, North America
With U.S. federal debt at 109 percent of America’s GDP and rising, low-risk interest rates will not last forever.
United States President Donald Trump continues to make a big deal of American trade deficits with China despite such bilateral deficits or surpluses being irrelevant. They are irrelevant in part because a significant amount of what Americans buy from China includes components imported by China from other countries. However, what should Americans think about the more important global U.S. trade deficit in April 2018 of $ 573 billion, up from $ 520 billion the previous year from May 2016-April 2017? What would happen if the United States could get rid of it and how might America do that?
The short answer comes from the fact that the U.S. trade deficit more or less financed Uncle Sam’s fiscal deficit. In fact, foreigners own almost half of the cumulative outstanding U.S. Treasury debt of $ 14.84 trillion (i.e., $ 6.17 trillion). Virtually the only way to get rid of American trade deficits is to get rid of the U.S. fiscal deficit. During President Trump’s first year in office, however, the federal government’s deficit rose from $ 585 billion in 2016 to $ 666 billion in 2017 and is projected at $ 804 for 2018.
At the end of April, the U.S. public debt was $ 21 trillion or 109% of America’s total gross domestic product (GDP). Of that, $ 15.3 trillion was held by the public, and the rest was primarily held by the Federal Reserve Banks and the Social Security Trust Fund. The U.S. government paid $ 458.5 billion in interest on its debt outstanding in the most recent fiscal year of 2017. As interest rates rise over the next few years, this will at least double over the next decade. China holds about $ 1.2 trillion of this debt, meaning that it has helped the U.S. government finance its debt to that extent.
The U.S. fiscal deficit (which is the flow of new debt per period) was $ 666 billion—3.5% of GDP—for the Financial Year 2017, which ended in September. If America’s budget balances over the business cycle as it should, the United States should have had a surplus of about that much at this point because the economy is fully employed. The forecast deficit for 2019 and beyond is one trillion dollars per year as far as the eye can see even with a Republican Congress and Administration. This is not sustainable and will eventually collapse of its own weight.