The United States debt in 2024 grows and thus affects Mexico and the world

How much is the United States debt?

The United States debt has reached an all-time high in 2024. Data from the Treasury Department indicates that it stands at $34.5 trillion.

The United States explains that notable recent events that triggered large increases in national debt include: the wars in Afghanistan and Iraq, the Great Recession of 2008, and the Covid-19 pandemic.

From fiscal year 2019 to 2021, spending increased about 50%, largely due to the pandemic.

Tax cuts, stimulus programs, increased government spending, and declining tax revenues caused by widespread unemployment explain sharp increases in the national debt.

How does the US debt work?

Information from the Treasury Department and the Bureau of the Fiscal Service indicates that the national debt allows the federal government to pay for important programs and services.

It defines it as the amount of money that the federal government has borrowed to cover the outstanding balance of expenses incurred over time.

For example, in a given fiscal year, when spending exceeds revenue, a budget deficit occurs. To pay for this deficit, the federal government borrows money by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities.

So the national debt is the accumulation of this loan along with the associated interest owed to the investors who purchased these securities. As the federal government experiences recurring deficits, which is common, the national debt grows, he explains.

But there is a debt ceiling, a restriction imposed by Congress on the amount of outstanding national debt the federal government can carry.

The debt ceiling is the amount the Treasury can borrow to repay overdue bills and pay for future investments.

Once the debt ceiling is reached, the federal government cannot increase the amount of outstanding debt, losing the ability to pay bills and fund programs and services.

This is how it affects the rest of the world

Looking ahead, global public debt is expected to approach 100% of GDP by the end of the decade. This increase in global public debt is mainly driven by the United States and China, the IMF estimates.

According to Vitor Gaspar, director of the IMF's Fiscal Affairs Department, lax fiscal policy in the United States puts upward pressure on global interest rates and the dollar.

The above increases financing costs in the rest of the world, exacerbating existing fragilities and risks.

Although a modest fiscal adjustment is projected in the medium term, it will be insufficient to stabilize public debt in many countries.

Under current policies, primary deficits will remain above debt stabilization levels in 2029 in about a third of advanced and emerging market economies and in almost a quarter of low-income developing countries.

Higher real interest rates and lower medium-term growth prospects increase pressures on debt.

How does it affect Mexico?

The Mexican economy depends a lot on what happens with the American economy; if the national debt gets out of control and defaults, it could put the neighboring country, Mexico's main trading partner, in trouble.

According to an analysis by the Real Instituto Elcano laboratory, a default by the United States would generate a strong increase in the yields of the public debt issued by the Treasury, which would lead to a revaluation of the rest of the financial assets.

The above is because United States Treasury bonds are the risk-free asset par excellence and are used for the valuation and pricing of the rest of the assets.

In the event of a default, there would be increases in the yields of the rest of the fixed income assets while the stock markets would fall and the dollar would possibly depreciate. Furthermore, financial chaos and uncertainty would lead to a contraction in consumption and investment and a decline in credit, likely pushing the United States into a recession.

With a US economy in recession, Mexico could face a reduction in its trade, in addition to an impact on incoming remittances due to a contraction in the labor market.