David McWilliams: Why the US’s deteriorating financial health is bad news for Ireland

Could the United States be going bust? Perhaps this is not the sort of question that people should raise in polite company, but the signs of a gradual erosion of American solvency are there for all to see. To make matters worse there does not appear to be anyone within either the Republican or the Democratic leadership who appears to be concerned about the credibility of the United States’s fiscal and debt deterioration. One crowd is happy to keep cutting taxes, while the other lot are promising more spending. As always, it is the bond market that signals problems ahead. The interest rate on American debt (the price the market is willing to lend to the US government) has been rising gradually over the past few weeks as people begin to take on board some of the disturbing budgetary arithmetic. In response, Scott Bessent, the US Treasury secretary, reacted in possibly the least responsible way: by dismissing the views of people who lend money to the US as not really understanding the complexity of the economy. When you are dependent on other people, it is sometimes wise to listen to their concerns. But whether it is listening to military experts about the risk of an impossible war in Iran or listening to the financial experts about the risk of budgetary incontinence, a characteristic of this administration is hubris, arrogance and ultimately folly. So maybe we should not be too surprised by Bessent’s antics. READ MOREThe fact remains that the US budgetary position is deteriorating rapidly. For example ,it took the US, despite two world wars and the Cold War, more than 200 years to amass $1 trillion dollars of debt. This milestone was reached in 1981. Now, however, it has added $1 trillion in the past four months alone, bringing the total US national debt to a record $40 trillion. The Trump administration is running a huge annual deficit of 6 per cent of Gross Domestic Product (GDP), which is adding about $2 trillion to the outstanding debt each year. Meanwhile, the economy is motoring ahead nicely; unemployment is at 4 per cent, so it is not that the US is in recession and requires such a significant boost from government spending. On the contrary, the deficit should be far lower, as the economy is growing reasonably. The $40 trillion debt is the result of various US presidents either not raising enough revenue or not limiting public spending. Incidentally, the crisis is not all of Trump’s making. The appetite of US administrations to “buy now and pay later” has been growing since Bill Clinton – the last prudent occupant of the White House – left office. Both Republicans and Democrats are to blame. In addition, the partisan nature of Capitol Hill politics, where ideology rather than pragmatism reigns, implies there is no credible bipartisan path to sorting this out. As US politics has become more divided and vituperative, the ability of the traditional system to right itself has collapsed. The solution appears to be to “leave it to the next guy” to sort out. The markets have taken this medium-term prognosis on board and are beginning to worry about the long-term notion that the US is always the world’s safest bet. While it is not about the fear of any imminent collapse, there is a nagging feeling that the credibility of American policy-making renders the dollar and the US bond market more risky than ever before.The US’s reputation is being undermined by the current administration’s aggression, be it in tariffs, insults, or military bullying. Such posturing has consequencesThis may seem academic, but it matters, because the US government’s long-term interest rate is the most important price in the global financial system. It is the foundational collateral of the entire banking system. When banks borrow money from central banks, the central banks require collateral to cover the loan. They demand government debt as security, and the biggest form of security is US government debt. This is why the treasuries of large US banks own so much US debt; they need it to play the banking game. Ireland is often cited as being a huge owner of US government debt, but it is not us, the Irish citizens who own this stuff. It is actually the large American banks domiciled in Dublin’s International Financial Services Centre (IFSC). The IFSC could be described as a large warehouse stuffed with American bonds. As the interest rate on the US long bond rises, all interest rates go up because the cost of money increases. This process of “shunting on”, whereby all interest rates take their lead from the US bond market, means mortgage rates quickly rise, as too do overdrafts, credit card bills and the like. In addition, large American corporates and big multinational companies own huge amounts of US government debt, which they too use as security to borrow to expand their operations. So their cost of financing rises. [ US long-term bonds slide as Bessent intervention fails to soothe investorsOpens in new window ]One fascinating aspect of all this has been the growing internationalisation of the US bond market. For years, Americans lent to their own government and other investors did likewise, with German investors lending to Germany, Spanish investors to Spain, and so on. But over the past 30 years, that has changed. Today, foreigners own 25 per cent of all US government debt, and that proportion has been rapidly increasing. As foreigners have become richer, many have been investing in the US, be that in the shares of US companies, the US currency or US government debt. This has been a boon for the Americans, but it makes them vulnerable to a change in international sentiment towards their country. The US’s reputation is being undermined by the current administration’s aggression, be it in tariffs, insults, or military bullying. Such posturing has consequences. As long as no other country steps forward and accepts playing the lead role in global finance (a role the Americans have played with gusto since 1945), the US has time. But longer-term cracks will emerge. For Ireland, probably the most American-adjacent country in the world, a weakening Washington is not a good thing. We have gambled the house on the US, from the IFSC to the Silicon Docks, from big American pharma to even bigger US medical devices and microchips. This has been a shrewd, if contentious, move. No other foreign country’s fate is so intertwined with that of the US, which is why, for selfish reasons, we must hope that the US avoids the type of financial crisis that over millenniums has afflicted so many other fading superpowers, from the Romans to Imperial Spain to the British Empire.