06/07/2026 05:51 AST
The United States' mounting public debt poses the biggest macroeconomic threat to its long-term economic dominance, with record deficits, rising interest costs and political gridlock threatening to erode one of the country's biggest structural advantages, according to a Deutsche Bank Research Institute thematic report.
The report, released ahead of the 250th anniversary of the US Declaration of Independence, said that while China's emergence as a global economic rival has narrowed America's lead in manufacturing and trade, "the US fiscal trajectory is the most plausible catalyst" that could accelerate a weakening of the country's economic position.
"The US fiscal trajectory is the most plausible catalyst to accelerate that erosion, and for institutional investors is the single most concrete macroeconomic risk facing the United States," the report said.
According to the report, the federal deficit has remained at around 5-6 per cent of GDP since 2022 despite the economy operating near full employment, making these "the highest peacetime deficits in US history outside of a major recession."
It warned that "debt held by the public is set to surpass 100% of GDP this year", while "interest payments on the federal debt now exceed defence spending and are the fastest-growing line item in the budget."
The report said the fiscal challenge is becoming more urgent as major entitlement programmes approach funding constraints. It noted that the Social Security trust fund is projected to be depleted by late 2032, triggering automatic benefit cuts unless lawmakers intervene, with Medicare facing a similar situation shortly afterwards.
"While the unsustainability of the US public debt trajectory has been in the headlines for many years, these events are now more imminent -- ones that the next US administration that takes office after the 2028 election will have to face," the report said.
The report also warned that continued fiscal deterioration could gradually weaken the US dollar's global dominance. While it said no alternative currency is ready to replace the dollar, it expects a "gradual erosion" of the US currency's reserve status rather than a sudden collapse.
It noted that the dollar's share of global foreign exchange reserves has fallen from about 72 per cent to 58 per cent over the past two decades, while central banks have increased gold purchases and several countries have explored alternatives following sanctions and shifts in global trade patterns.
Despite these challenges, Deutsche Bank maintained that the US is likely to remain the world's leading economy because of structural strengths, including deep capital markets, technological leadership, abundant energy resources and its lead 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, adding that its "collective structural advantages remain difficult to replicate."
ANI
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