As US citizens swiped their credit cards, took out record loans and applied for mega-mortgages during the pandemic, the US government did the same with COVID-19 stimulus; The potential impact of this pileup was far beyond our imagination.
But a recent outcry over national debt suggests the U.S. could become a little more frugal and perhaps a little more European.
Panic in the USA
In the USA, major voices from the financial world, from Jamie Dimon to Jerome Powell, have sounded the alarm about the excessive national debt.
The U.S. government has gone debt-crazed since the start of the COVID-19 pandemic, with Trump’s $2.2 trillion COVID stimulus package and President Joe Biden’s Inflation Reduction Act pushing the national debt to record highs.
At last count, the U.S. debt-to-GDP ratio was 121%. The staggering figure of $33.1 trillion means that every American owes $100,000.
As interest rates rise, this unusually high reading is beginning to unnerve analysts. “Black Swan” author Nassim Taleb, who correctly predicted the 2008 financial crisis, fears that debt could become the cause of a more predictable crisis for the U.S. government.
Jamie Dimon said the US needed to address debt levels before foreign holders of US bonds committed a “rebellion”, while former Fed Chairman Jerome Powell said it was time for Americans to have an “adult conversation” about lead to debt levels.
When did the United States, the land of financial abundance and free flow of credit, evolve into a mindset that was more common across the Atlantic?
Debt aversion
Key policymakers and think tanks are panicking about the debt in ways that would have seemed hysterical just a few years ago.
Before and in the early days of the COVID-19 pandemic, historically low interest rates meant that governments were effectively benefiting from free money.
In the US, this, along with historical factors such as a strong dollar, a strong economic growth engine and sustained demand for the country’s government bonds, has given policymakers reassurance that debt can be reduced at any time. But things aren’t as rosy as they used to be.
That’s because most countries are currently struggling with the whiplash of massive increases in public spending during the pandemic. The combination of these repayments and rising interest rates to ward off generationally high inflation rates
In fact, in early April, the International Monetary Fund (IMF) sent a warning to the UK over its debt profile, highlighting the country and Italy as two of four major economies that “need to take urgent policy action to address fundamental imbalances between spending and revenue.” . ”
Meanwhile the mighty US dollar. The increasing influence of the BRICS bloc of Brazil, Russia, India, China and South Africa has created a real competitor to the dollar, fueling the possibility of “de-dollarization.”
This pressure is forcing the US into an uncomfortable discussion about its relationship to debt.
A cultural change
But it could also mark an unlikely cultural shift in the way Americans perceive debt. These changes mean that the USA is becoming more and more like the Europeans.
US citizens tended to be more comfortable with debt, at least privately. In 2021, more than two-thirds of people in the country had a credit card, compared to around 38% of people in France, for example.
But since the start of the financial crisis, the trends have reversed.
In the United States, private debt to GDP fell from 99% in 2007 to 74% in 2022, according to the International Monetary Fund (IMF).
France’s private debt rose from around 46% to 68% over the same period.
Several European governments have been more restrictive in the past regarding the levels of their private and public debt.
Germany, for example, has a constitutional fiscal rule that limits deficits to 0.35% of GDP per year, but this can be extended during economic downturns. In the past, this rule was enough to put a stop to projects. Eurozone countries also adhere to stricter debt rules.
Citizens across the continent are also becoming more cautious about their personal finances.
“It’s not just about national debt, but also private debt. They don’t like being in debt,” Zareh Asatryan, corporate director in the corporate taxation and public finance research area at the Leibniz Center for European Economic Research (ZEW), said of the Germans.
“If you look at mortgages, for example, only half of Germans own an apartment. They don’t like taking out mortgages or buying homes.”
A 2015 Pew survey also found a generational shift in the way Americans perceived debt. The survey found that 70% of baby boomers viewed loans and credit cards as increasing their opportunities, while 60% of millennials felt the same way.
“They lived through the Great Recession very strongly: Millennials came of age during this time and saw how high levels of debt affected households’ immediate financial security and prevented them from saving enough for later, and Generation X suffered the loss of real estate assets and other things.” “We are suffering more from the effects of the recession than many other Americans,” researchers wrote at the time.
French exit
According to ZEW’s Asatryan, there is one key area where the U.S. continues to differ from Europe, meaning its fight over debt isn’t quite as urgent: economic growth.
According to the IMF, the US economy is expected to grow by 2.7% this year.
However, it doesn’t look like it was enough to pay off the debt. The country’s deficit jumped to 5.7% of GDP in 2023, a shift that could be the main reason for the recent uproar among analysts. In early April, the IMF called on the US to urgently address this deficit.
There is also a significant decline in France, where panic over the country’s debt situation is in full swing.
France has turned heads in recent months as the country’s deficit rose to 5.5% in 2023, while economic growth was a meager 0.8%.
Economists at ING said the renewed focus on France’s troubled debt situation marked the culmination of a “spectacular turn of events” that was all bad news for the country.
Global ratings agencies Moody’s and Fitch were due to release updated forecasts on France’s debt on Friday.
“Ultimately, 2023 was synonymous with a significant deterioration in public finances. The official figures are not yet fully published, but France will be among the worst fiscal countries in the EU,” wrote ING.
He had already downgraded France to AA- last November, citing the country’s high national debt as a particular weakness.
A new panic over U.S. debt could mark the culmination of a longer reversal in how Americans approach debt, both at the micro and macro levels.
France’s current situation, where investors are thinking twice about investing their funds in the country, could give the country a good reason to fuel these fears.
This story was originally published on Fortune.com