Editor's note: Anthony William Donald Anastasi, a special commentator on current affairs for CGTN, is an associate professor of economics at Wenzhou Business College. The article reflects the author's opinions and not necessarily the views of CGTN.

In recent years, the United States' public debt has been growing quite rapidly. Federal government debt has just surpassed the $35 trillion mark, making the U.S. public debt the largest in the world in absolute terms. However in relative terms, for the year 2023, the United States' debt-to-GDP ratio sat at about 123 percent; large, but below countries such as Japan and Italy.

The puzzling part of the growth in public debt is that it is growing at a time when the United States economy is quite strong. Republicans will state it is because of the "reckless" public spending passed under the Joe Biden administration. In fact, Warren Mosler, the godfather of Modern Monetary Theory which advocates for large public deficits in times of weak economic growth to return to full employment, recently said that the United States government is currently "spending like a drunken sailor." Democrats will quip back, reminding Republicans of the "reckless" Trump tax cuts and the record amount of public debt he left.

While both have some truth to them, the domestic debate about public deficits and debt often overlooks significant international structural factors. To fully understand why the United States' debt is so large and its domestic and international effects, these factors must be considered.

The reason why the United States needs to run large deficits is straightforward: the international status of the U.S. dollar. As I have argued before in this publication, the international status of the U.S. dollar (the currency of international trade and the global reserve currency) inflates the value of the U.S. dollar relative to other currencies, and pulls domestic production below domestic demand, resulting in a trade deficit.

Countries with trade deficits have two options in the face of the challenges of having low domestic production relative to domestic demand. One is higher unemployment. Domestic producers are unable to compete with economically more attractive imports and are forced to scale back or close up shop, resulting in fewer people employed. The second option, higher debt, is more attractive politically and economically. This allows more people to retain employment and for domestic demand to not take a hit in the face of relatively weaker domestic production. However, these deficits — both federal budget and trade — reinforce the U.S. dollar's international status by supplying the world with dollars for trade and accumulation, making this cycle entrenched.

Now, what effects will the United States' large budget deficits and growing debt have on the global economy? On one hand, the United States' large budget deficits strengthen its domestic demand and thus expand its trade deficit with the rest of the world. This provides demand for products produced outside of the United States and helps contribute to global growth.

On the other hand, a large deficit at a time of low unemployment does not bode well for inflation. In 2025, the United States will get a new president, and she (or he) will try to pass new legislation that would most certainly grow the deficit and lead to inflation. This would force the Federal Reserve to hold back on interest rate cuts, or worse, raise them again. As a debt crisis could very well start in developing countries with debt denominated in U.S. dollars, further interest rate hikes by the Federal Reserve would act as a crushing blow to them. A debt crisis in the developing world would lead to unthinkable harm to the livelihoods of their citizens and the well-being of their national economies, which would most certainly lead to social or even political crises.

The United States' large public debt means that a significant portion of the federal government's budget must go to servicing this debt, which could result in even more debt. If the Federal Reserve's independence does not allow for coordination with the Treasury and Congress, this cycle of high debt leading to higher debt servicing costs, which then lead to higher debt, could lead to a crisis of its own. The United States would be forced to rein in its federal deficit, leading to an economic slowdown which would deal a large blow to the residents of the United States, namely the least well-off, and to the global economy, which in part relies on demand from the United States.

While the United States' large public debt could lead to crises, both domestic and international, there is one real way to contain it: changing the international status of the U.S. dollar. As stated before, the entrenched cycle of public deficits, trade deficits and the international status of the U.S. dollar reinforce themselves. If the United States wishes to reindustrialize, contain its debts, and contribute to a more stable, balanced global trading system and international economic environment, this cycle must be broken.

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