Fast lane to bankruptcy: Musk warns of spiralling debt amid US government's borrowing spree

US Govt debt crisis: Tesla and SpaceX chief executive Elon Musk has sounded a grim warning about the direction of United States government spending, saying current fiscal policies are on course to bring America to bankruptcy. His comments could not have come at a more opportune time when the US national debt has breached the $35 trillion mark in July, with the government set to jack it up by another $16 trillion until 2035. Musk's comments have fanned the debate hot on US fiscal policies' sustainability and the health of the US economy in the long run.

Increasing debt crisis

The debt has grown steadily over decades; however, it started to take off in recent years due to deep tax cuts, increased military spending, and extensive stimulus packages to counteract the debilitating economic impacts of the COVID-19 pandemic. According to the Congressional Budget Office (CBO), that will rise to $50 trillion by 2034, more than 122 percent of the nation's Gross Domestic Product. This number reveals an alarming variance between government spending and economic productivity in the United States.

Musk, never one to hold his opinions close to his chest on anything, has led from the front foot on the dangers of such huge debt. "At current rates of government spending, America is in the fast lane to bankruptcy," Musk wrote on X, the social media platform he owns. He went further to say that government overspending is a major cause of inflation, a fear shared by many economists who say sustained inflation could rob American consumers of their purchasing power and disrupt financial markets.

Critical spending in crisis

High debt comes with high service cost. According to US Treasury report, the total interest payments on the national debt amounted to $357 billion for the first 10 months of the fiscal year 2024, outstripping the $283 billion spent on military and defense. In other words, interest payments are consuming more of the federal budget than basic requirements such as infrastructure, education, and other vital services.

Federal Reserve Chair Jerome Powell recently joined the chorus of concern about the escalating interest burden. He said high levels of debt mixed with an increasing rate of interest may lead to a snowballing effect-a circumstance wherein government has to borrow more in order to pay the interest, hence worsening the problem of debt. "This is not a sustainable path," Powell said in a recent address, beseeching lawmakers to take immediate action with regard to the structural imbalances within the federal budget.

Economic and political implications

And the implications of this on a surging national debt go well beyond finance. Fitch Ratings recently downgraded the US government credit rating-a first since 2011. This probably will raise borrowing costs for the US government and trigger a wider reassessment of the country's economic outlook.

For a long time, experts have been warning Washington over the debt crisis that is snowballing. Jamie Dimon, chief executive of JPMorgan, has appealed for a more responsible fiscal approach, long-term focused and reaching out for bipartisan cooperation. Separately, Brian Moynihan, Bank of America's chief executive, last month issued calls for caution over the economic consequence of political polarisation.