US debt nears $41 trillion ceiling: What it means for global economy

The United States is approaching its statutory debt ceiling of $41.1 trillion, with the Congressional Budget Office projecting that federal debt will climb to about $64 trillion by 2036. While the scale of borrowing has raised concerns among economists, most agree that the situation is not yet critical, thanks to the unique position of the US economy.

Mohamed El-Erian, chief economic adviser at Allianz, describes the current state as a "flashing yellow light" rather than a "flashing red light." He points out that the dollar's status as the world's reserve currency and the size of the US economy give Washington "a much longer runway to fiscally misbehave" compared with other nations.

At 126 percent of GDP, US national debt is high by historical standards but remains lower than that of other Group of Seven nations such as Japan and Italy. This relative position offers some reassurance, but economists warn that investor appetite for US government debt is weakening.

"Investor appetite in lending the US government money through buying bonds is diminishing," says Eric Swanson, an economist at the University of California. This creates a "vicious cycle," he explains, where the government must offer ever higher yields to attract buyers, increasing borrowing costs further.

Higher US borrowing costs inevitably spill over to the rest of the world. "What happens in the US never stays in the US," El-Erian notes, as global financial markets are closely interconnected.

Charlie Bean, emeritus economics professor at the London School of Economics, warns that if the debt-to-GDP ratio reaches a certain threshold, it could trigger a fire sale of US bonds and destabilise financial markets. However, he emphasises that no one knows exactly where that tipping point lies.

"There probably is a point, but unfortunately we don't know where it is," Bean says. "It's not as if there's a fixed number that we could say, 'if it gets to 150 percent, disaster will happen, but we're OK if we stay at 145.'"

The debt ceiling is a limit set by Congress on how much the US government can borrow. When the limit is reached, the Treasury must use special measures to avoid default, potentially leading to a government shutdown if lawmakers fail to raise or suspend the ceiling in time.

Although the US has never defaulted on its debt, political standoffs over the ceiling have caused market volatility in the past. The current trajectory of debt growth underscores the need for fiscal reform, but economists caution that abrupt cuts could harm economic recovery.

For now, the consensus is that the US retains time and capacity to address its fiscal challenges. But as El-Erian puts it, the longer the delay, the greater the risk of crossing the line from yellow to red.