US fiscal and government debt woes fueling fears of the making of new financial crisis

Ten years after the global financial crisis ignited by Wall Street giants, the US’ worsening fiscal outlook and mounting government debt are fueling fears of a new crisis that could plunge the world economy into recession once again.

The worsening fiscal outlook is not an imminent threat to the global economy, but the risk of a global recession is real, and countries need to take immediate action to strengthen their defenses.

The US economy is experiencing one of the longest expansions on record, but the damage of Washington’s budget deficit is hiding in plain sight.

Some analysts have forecast that the federal deficit will reach $1 trillion by the end of this fiscal year.

Tax cuts and increased government spending are big factors in the current economic boomlet in the US, but fiscal stimulus is the main reason behind the accumulated deficit. The next financial crisis faced by the US may be caused by its increasing federal deficit, because that deficit may force the government to cut core programs to reduce its annual expenditures.

One of the worst-case scenarios is that the US government will print more money and prop those programs up, leading to a sharp depreciation of the US dollar.

Billionaire hedge-fund manager Ray Dalio forecast the US economy is roughly two years from a downturn, which will see the dollar plunge by as much as 30 percent, creating a “dollar crisis,” according to Bloomberg.

A dollar crisis is likely to create an economic ripple effect in the global economy and trigger a downward economic cycle.

In global trade, the use of the dollar is quite widespread, and a steep fall in the dollar is likely to deal a heavy blow to emerging economies’ export sectors.

Further, the bull market in the US is almost nine years old. As stocks keep climbing, more and more analysts have begun to think the market has peaked. Any external factors, including a dollar crisis, are likely to be a turning point for the markets.

The US financial system poses one of the biggest risks to global financial stability, and emerging economies should remain vigilant.

The author is a reporter with the Global Times. bizopinion@ globaltimes.com.cn