The IMF Warns That US Deficit Presents “Significant Risks” to World Economy
Jose Nino
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The International Monetary Fund warned that the United States’ fiscal deficit presents “significant risks” to the global economy. The IMF also alluded to concerns about fiscal imbalances in China, Italy, and the United Kingdom
The IMF argued that the US government’s fiscal deficits have kicked off inflation and pose “significant risks” for the global economy.
According to the IMF’s projections, the US is expected to record a fiscal deficit of 7.1% in 2024. This is over three times the 2% average for other advanced economies.
On top of that, the IMF is concerned about Chinese government debt, with the country projected to record a deficit of 7.6% in 2025. This comes at a time when China is dealing with weak demand and a housing crisis.
The US and China were among four nations the fund listed that “critically need to take policy action to address fundamental imbalances between spending and revenues”. The other countries were the UK and Italy.
Large spending by the US and China, specifically, could “have profound effects for the global economy and pose significant risks for baseline fiscal projections in other economies”, the IMF highlighted.
On April 16, 2024. IMF Chief Economist Pierre-Olivier Gourinchas stated that the US’s fiscal position was “of particular concern”, hinting that it would throw a wrench in the Federal Reserve’s attempts to hit its 2% goal.
“It raises short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy,” he stated. “Something will have to give.”
Governments’ debt burdens have increased after high spending measures carried out during the early stages of the Wuhan virus pandemic and huge increases in global borrowing costs as central banks have attempted to curtail the worst level of inflation in decades.
At the end of 2023, the Congressional Budget Office stated that the US’s federal debt load totaled $26.2 trillion, or 97% of gross domestic product.
The IMF observed the US had manifested “remarkably large fiscal slippages” with the fiscal deficit reaching 8.8% of GDP last in 2023 — a twofold increase from the 4.1% deficit figure recorded for 2022.
The CBO already believes the bill for net interest payments to holders of American debt will surpass $1 trillion after 2026.
The IMF highlighted that “large and sudden increases” in American borrowing costs generally cause increases in government bond yields worldwide and exchange rate instability in emerging markets and developing economies.
One thing that the IMF noted is that Chinese government debt, in contrast to US Treasuries, is largely held domestically, so a steep rise in interest rates is unlikely to have an effect on global markets in the same manner.
The US is clearly facing a fiscal crisis. Decades of big spending policies coupled with a loose monetary policy, high taxation, and a heavy-handed regulatory state has created an economic environment of total chaos.
With the Wuhan virus pandemic hitting the world hard, the US’s flimsy fundamentals have been exposed. What’s worse will be the baby boomer mass retirement of the late 2020s, which will only exacerbate present trends of fiscal instability and potentially bring the country to a potential state of debt default.
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