The United States may be leading the global economy, but its growing debt burden has emerged as the biggest threat to its economic pillar. America’s debt burden has emerged as the biggest threat to its long-term economic leadership, with rising deficits and rising borrowing costs slowly eroding one of the country’s biggest structural advantages, the Deutsche Bank Research Institute reports. The report warns that this fiscal downturn could pose a greater risk to the US economy than external competition.The assessment, published in a thematic report ahead of the 250th anniversary of the US Declaration of Independence, said China’s growing influence has eroded America’s lead in areas such as manufacturing and trade, but the country’s own fiscal outlook poses a more immediate challenge to its long-term economic health.“The US fiscal trajectory is the most plausible catalyst for accelerating that erosion, and for institutional investors it is the most concrete macroeconomic risk facing the United States,” the report said.According to the report, the US is projected to continue running a federal deficit of about 5-6% of GDP by 2022, even as the economy remains close to full employment. It described these as “the largest peacetime deficits in American history other than a major depression.”The institute said government borrowing has reached the point where debt held by the public is expected to exceed 100% of GDP this year. At the same time, the cost of servicing that debt has increased rapidly, with interest payments now overtaking defense spending to become the fastest growing component of the federal budget.The report also highlights the increasing pressure on entitlement programs, saying that major social welfare funds are approaching financial constraints. It was projected that the Social Security trust fund would be exhausted by the end of 2032, resulting in automatic benefit cuts unless lawmakers take action. It says Medicare is expected to soon face a similar funding challenge.“While the unsustainability of the US public debt trajectory has been in the headlines for many years, these events are now even more imminent – facing the next US administration that takes office after the 2028 election,” the report said.Beyond public finances, Deutsche Bank said continued fiscal deterioration could gradually erode the US dollar’s position as the world’s leading reserve currency. It stressed that it does not expect any other currency to replace the dollar in the near future, but expects its global reserve position to experience a “gradual erosion” rather than a sudden decline.The report said the dollar’s share in global foreign exchange reserves has fallen from about 72% to 58% over the past 20 years. During the same period, central banks have increased their gold holdings, while many countries have begun to explore alternatives amid sanctions and evolving global trade patterns.Despite highlighting these fiscal risks, the report says the US is well-positioned to maintain its economic leadership due to enduring structural forces. These include its deep capital markets, leadership in technology, abundant energy resources and its advantage in artificial intelligence.“The challenges facing the US are real, but the weight of evidence still suggests it will remain the world’s leading economy for the foreseeable future,” the report said. The report said its “collective structural benefits are difficult to replicate.”
