348 trillion in debt looming! This round of the oil crisis hits at a fragile moment globally, and the U.S. can't escape unscathed?

Questioning AI · Why is it difficult for the U.S., the largest oil producer, to respond to shocks due to high deficits?

Source: Global Market Broadcast

Ruchir Sharma, Chairman of Rockefeller International and head of the global investment strategy division of Rockefeller Capital Management, stated that the world is facing an unprecedented crisis, and the current global debt level has reached a record high, making even the U.S., the world’s largest oil producer, particularly vulnerable.

In his Sunday column in the Financial Times, he warned that the extreme lack of fiscal space leaves heavily indebted governments with little room to respond to the energy shocks triggered by Trump’s Iran war.

Sharma pointed out that historical experience shows such crises often lead to fiscal budget collapses. The 1970s oil crisis was a turning point, after which governments shifted from occasional deficits to sustained long-term deficits.

Today, the average government debt ratio of the G7 has soared from just 20% of GDP back then to over 100%. Meanwhile, global debt last year grew at the fastest pace since the pandemic, reaching a record $348 trillion, more than three times the global GDP.

With one-fifth of the world’s oil and liquefied natural gas supplies trapped in the Persian Gulf, governments are rushing to implement price controls, rationing, and subsidy policies. But many governments are already out of fiscal room, and bond investors are ready to punish any overspending.

“Long-term inflation expectations seem stable, but markets worry that the Iran oil shock will further drive up government spending on the basis of rapidly expanding deficits and debt, leading to higher bond term premiums,” Sharma wrote.

This trend has already appeared in the U.S.: recent demand for U.S. Treasury auctions has been weak, forcing yields above expectations, highlighting investor concerns about the worsening deficits and debt due to the Iran war.

Meanwhile, central banks around the world are also hamstrung, making it difficult to effectively curb inflation. The Federal Reserve has failed to bring U.S. inflation back to the 2% target for five consecutive years, weakening its ability to hedge against economic slowdown caused by oil shocks through rate cuts.

“The most vulnerable countries are those with high government debt and deficits, and central banks unable to meet inflation targets. Among developed economies, the U.S. and the UK are most at risk; among emerging markets, Brazil, Egypt, and Indonesia are most exposed,” Sharma said.

He added that although the U.S. is the world’s largest oil producer, its nearly 6% annual budget deficit last year was the highest among developed countries, and the U.S. cannot remain insulated in long-term wars.

Trump plans to increase annual defense spending by 50% to $1.5 trillion, which could further worsen the U.S. debt outlook—currently, U.S. debt interest payments exceed $1 trillion annually. Sharma estimates that, combined with recent tax cuts, the U.S. deficit-to-GDP ratio could rise to 7% this year.

Trump previously expected the Iran war to last 4 to 6 weeks. Now, the conflict has entered its sixth week, with little sign of a quick end.

In fact, all signals point to escalation and long-termization: thousands of U.S. troops are being deployed to the Middle East; a third aircraft carrier is en route; the Pentagon has almost fully deployed its stock of JASSM-ER stealth cruise missiles to the Middle East battlefield.

All of this comes at a high cost. Reports indicate that after expensive munitions are heavily consumed and U.S. aircraft, radar systems, and bases are damaged by Iranian attacks, the Pentagon is seeking Congress to allocate $200 billion for the war.

Joseph Brusuelas, Chief Economist at RSM, noted in a report at the end of last month: “Additional war spending will exacerbate U.S. debt, triggering bond market sell-offs as investors demand higher premiums to compensate for potential losses. Long-term rates like the 30-year mortgage rate are partly based on the yield of the 10-year U.S. Treasury. Most importantly: the bond market has never lost.”