Why raising the US debt ceiling is inevitable and rational

The gross debt of the General Government, the public debt, of the US as well as most developed countries, as we see in the charts below, has been steadily increasing in recent years. According to IMF data for G7 countries, gross general government debt from 2008 to 2022 increased in the US by 198.7%, while the increase was greater for the UK, which reached 226.6%. In Canada, gross general government debt increased by 151.5%, in France by 115%, in Italy by 62.8%, in Germany by 57.5% and in Japan by 51.9%.

General government gross debt, also known as public debt, is the nominal (face) value of total gross debt outstanding at the end of the year and consolidated between and within the government subsectors. Comprises outstanding stocks of liabilities in the financial instruments, currency and deposits, debt securities and loans.

The largest increase in debt occurred during the COVID-19 pandemic after governments approved a series of packages containing economic support measures, including direct payments to individuals, increased unemployment benefits, loans and grants for businesses, and funding for medical facilities and distribution of vaccines. Thus, they ensured the relative stability of the financial system at the time. The good news is that debt as a percentage of GDP after 2020 has remained stable or even declining for the G7 countries.

Raising the US debt ceiling

Today there is a considerable debate about whether the US debt ceiling should be raised. Despite the debt increase, the decision to increase it seems inevitable.

In Treasury Secretary Janet Yellen's opinion, refusing to raise the debt ceiling could be disastrous for the US economy. The debt ceiling has been raised several times in the past as Yellen periodically asks lawmakers to raise the debt ceiling as needed. A failure to raise it now would be unprecedented and, according to Yellen, lead to a US default.

But on the other hand, such a decision seems likely to lead to an increase in debt, which may have negative consequences for the economy in the long run, especially if the amount of debt financing remains high. In this case, the government would be forced to spend more money paying interest on the bonds sold, which could reduce the funds for government financing programs. Also, a high level of debt can lead to a loss of confidence on the part of foreign investors in the US economy and, therefore, to a decrease in the dollar's value. But is it so?

Raising the debt ceiling is imperative as it is necessary to cover government budget and project funding shortfalls; this increase will help maintain the volume of fiscal funding for many government programs and help businesses be competitive in global markets. In addition, the increase in the debt ceiling will allow the financing of social security programs, thereby ensuring sufficient domestic political stability with social cohesion, while in the business sector, it will help programs to relocate production, especially in high-tech sectors, back to the US.

Looking to the future

The US strategic goal is to plan long-term investments, with the majority of these investments directed to high-tech sectors that will be important to the strategic growth of the US economy. As geopolitical instability increases and the US wants to remain a leading global power, it is obliged to support high technology, fossil fuel de-dependency and be focused on the military industry. The vast US military budget and infrastructure projects must be financed largely by public debt. Based on the above, what seems more likely is not just a one-time increase in the debt ceiling but the adoption of a program of continuous increases in the debt ceiling that will allow the above goals to be achieved.

This strategy is expected to have global implications, pointing to similar moves for other developed economies. The increase in the funding ceiling is expected to serve the strategic goals of the US. This will be done immediately, especially now that economies are plagued by banking crises, in order to avoid the collapse of the financial system.

Thus indeed, raising the funding ceiling further increases debt and may undermine credibility and investor confidence, but investors will continue to invest in the US. Since the increase in debt is focused on the aforementioned strategic goals of the US, while the debt will increase, the economy will grow, creating conditions of long-term strategic dominance. Thus, the debt is likely to reach even more unprecedented levels in the coming years, but the attractively high-interest rates that will be offered by the federal central bank to investors will lead them to become the major financiers and sponsors of the long-term strategic goals of the US, contributing in the coming decades to an unprecedented flow of capital that will boost economic growth and serve the strategic plans for US hegemony.