The U.S. Debt is More Sustainable Than You Think
The U.S. national debt often serves as a focal point for debates about the country’s economic health. Critics argue that the rising debt, now surpassing $35 trillion, is unsustainable and that it could lead to a severe financial crisis.
Comparisons with China, whose economy has grown rapidly over the past few decades, further fuel concerns that the U.S. might be falling behind. However, these fears are often based on misconceptions. The reality is that the U.S. economy remains fundamentally strong, supported by unmatched tax revenues and the unique advantages that come with being the world's primary reserve currency.
In this article, we will explore why the U.S. is better positioned than many believe to manage its debt and maintain its economic leadership.
The Reality of U.S. Debt
The U.S. debt levels have indeed risen significantly, but this is not a new phenomenon. Throughout history, the U.S. has accumulated debt during periods of war, economic downturns, and large-scale public investments. For example, U.S. debt surged during World War II, yet the post-war economic boom helped manage and reduce the debt-to-GDP ratio significantly.
Critics often focus solely on the nominal debt figures without considering the U.S. economy’s ability to generate the revenues needed to service and reduce this debt. Debt, in and of itself, is not inherently problematic—what matters is the country’s ability to manage and repay it, which brings us to the importance of tax revenue.
The Power of U.S. Tax Revenue
One of the most overlooked aspects of the U.S. economy is its unparalleled ability to generate tax revenue. The U.S. federal government collected over $4 trillion in tax revenues in 2023, making it the most effective revenue-generating government globally. This revenue comes from a robust mix of corporate taxes, income taxes, and other sources, driven by a dynamic and diversified economy.
While China’s economy has been growing rapidly, with impressive increases in GDP and revenues, the same cannot be said about its taxable earnings. The U.S., on the other hand, has seen significant growth in taxable earnings over the past few decades, providing a stable and increasing revenue stream.
In fact, China’s government income has been falling sharply in 2024 according to Bloomberg. Fiscal revenues fell 4.1% on-year in the first five months of 2024.
Moreover, the U.S. tax system benefits from the strength of its corporate sector. U.S. companies, especially in technology, finance, and healthcare, consistently generate high profits, which translate into substantial corporate tax revenues. This revenue growth is sustainable and is expected to continue as these sectors expand and innovate.
The U.S. tax base is not just large; it’s also resilient. During economic downturns, tax revenues may decline, but they have historically rebounded quickly due to the underlying strength of the U.S. economy. This resilience ensures that the U.S. government can meet its debt obligations even during challenging times.
Reserve Currency Dynamics and the Printing Press Advantage
The U.S. dollar’s status as the world’s primary reserve currency provides the U.S. with unique economic advantages that many other countries, including China, do not have. A reserve currency is one that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. Currently, the U.S. dollar accounts for nearly 60% of global foreign exchange reserves. Although this position has been declining, there is a large gap between USD and its closest follower EUR.
This status is not just symbolic; it has practical implications for how the U.S. manages its debt. Because the dollar is in high demand globally, the U.S. can issue debt at lower interest rates compared to other countries. Investors around the world are eager to hold U.S. Treasury securities, viewing them as a safe and stable investment, especially in uncertain times.
Moreover, the U.S. has what economists refer to as "monetary sovereignty." This means that because the U.S. issues debt in its own currency, it can never be forced into default by external creditors. In the unlikely event that the U.S. needed to, it could print more money to pay off its debt. While this could lead to inflation if done excessively, the U.S. has historically managed this process carefully, using tools like interest rate adjustments and open market operations to maintain economic stability.
This unique position allows the U.S. to run larger deficits than other countries without facing immediate economic consequences.
Conclusion: The Resilience of the U.S. Economy
The U.S. economy, despite its high debt levels, remains fundamentally strong and well-positioned to manage its debt. The combination of robust tax revenues, the unique advantages of having the world’s primary reserve currency, and the ability to issue debt in its own currency provides the U.S. with a level of economic flexibility unmatched by any other nation.
While China continues to grow and expand its influence, the U.S. retains significant economic advantages that are often overlooked in discussions about debt and global competition. As long as the U.S. maintains its reserve currency status and continues to nurture its dynamic economy, it will remain capable of managing its debt and sustaining its economic leadership.
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