Illustration: Luo Xuan/GT

Since the 1970s, US government debt as a percentage of GDP has remained at less than 70 percent for roughly 30 years, but in 2009, the ratio of public debt to GDP jumped to 82.4 percent.

Since then, US federal debt has gone out of control, more than doubling from the 2007 level of $9 trillion to $20.44 trillion in 2017, equivalent to 105.4 percent of GDP. After including state and city governments' debt, the total amount was close to $26 trillion, about 130 percent of GDP.

The 2001 stock market crash was resolved through the rapid development of the real estate market, which, however, caused a larger global financial crisis in 2008. Increased debt and quantitative easing were used in response to the US subprime mortgage crisis, but will the resulting debt lead to another large-scale stock market collapse and economic crisis?

Whether there will be a new crisis depends on whether the US government still has creditworthiness and whether it reaches a limit in terms of the debt-to-GDP ratio and debt leverage. Excessive debt issues may cause a US dollar devaluation and lower credit ratings, while excessive leverage could lead to a US debt default, creating trouble for new debt issues.

The US economy will get into trouble when its government debt reaches the fatal upper limit that will lead to a stock market crash and dollar collapse. Specifically, annual debt interest plus maturing debt should not exceed annual fiscal revenue.

Based on the growth tendency of US debt in recent years, the total amount of government debt may exceed $30 trillion by 2023. If local government debt is also included, the debt-to-GDP ratio could reach 150 percent or so. At that point, the US government's annual tax revenue will not be enough to cover interest payments and its maturing debt, thus touching the fatal debt ceiling.

A currency issued by a sovereign country is mainly supported by its economic development, essentially the government's tax and fiscal revenue. However, if a country's debt interest and maturing debt use up the full year's revenue, there will be no scope for new debt issues, thus affecting the nation's financing ability for debt repayment and causing a major financial crisis.

It is justified for the US to adopt expansionary policies to run some fiscal deficits for an economic recovery. Although excess monetary expansion may trigger a fiscal crisis and inflation, due to the global currency status of the US dollar, foreign investors have been attracted by high US interest rates to buy dollar-denominated assets. To a certain extent, this trend has offset the negative impact of fiscal deficits on investment.

For this reason, major US economic indicators like the growth rate, corporate profits and unemployment have been good in the past few years. But according to the IMF, if a country's debt-to-GDP ratio increases by more than 30 percentage points in five years, it will face a high probability of a financial crisis within five years.

The US debt-to-GDP ratio has risen by more than 30 percentage points for two consecutive five-year periods since the 2008 financial crisis, from less than 70 percent to the current 130 percent. Therefore, if the current growth rates of debts and deficits continue, a crisis will occur within the next few years.

Of course, the US will take measures to ease the pressure of excess debt. There are three ways to do so.

First, in order to maintain the status of the US dollar and continue financing for debt repayment, the US is unlikely to directly default on its debt. But it may indirectly default by means of devaluing the dollar and inflating prices.

Second, the US could transfer the crisis to others by raising interest rates and shrinking its balance sheet. In the past, whenever the US started a rate hike cycle, it would evolve into a slowdown or crisis for a certain area or region.

With this round of US rate hikes, the South Africa rand, Indian rupee, Indonesian rupiah, Russian ruble and Argentine peso have all depreciated sharply in recent months. Now everyone is wondering whether the recent depreciation of emerging-market currencies indicates that the new round of financial crisis will occur in emerging markets.

Third, the US may use its economic strength to change the rules of the game. The nation is now busy blaming others for its huge trade deficits, which, in fact, are caused by its own economic structure, not by other countries. In its problematic economic structure, 85 percent of GDP comes from the finance-centered services sector, while manufacturing only accounts for 11 percent.

While the US economy seems to have recovered quickly from the 2008 financial crisis, its structural problem has worsened, with the proportion of manufacturing in GDP further declining.

The economic stimulus measures proposed by the Trump administration may temporarily ease the structural difficulties in the economy, but they still cannot resolve the problem. Instead of trying to adjust its domestic economic structure and reduce its deficits (especially in terms of military spending) to relieve fiscal pressure, the US government chose to provoke trade friction around the world, promoting anti-globalization. But there is no way that such measures can solve its inherent structural and debt problems.

The article was compiled based on a speech by Huang Qifan, former Chongqing mayor and vice chairman of the National People's Congress Financial and Economic Affairs Committee, at the 2018 Symposium on Global Economy and Finance in Shanghai on October 15. bizopinion@globaltimes.com.cn