(Fortune) - As U.S. citizens swiped their credit cards, took on bumper loans, and applied for mega-mortgages during the pandemic, the U.S. government did the same with COVID-19 stimuli; the potential repercussions of that pileup were far from top of mind.
But a recent outcry over public debt suggests the U.S. could be turning a bit more frugal, and, possibly, a bit more European.
U.S. panic
In the U.S., major voices in finance from Jamie Dimon to Jerome Powell have sounded the alarm on outsize levels of public debt.
The U.S. government has gone debt crazy since the onset of the COVID-19 pandemic, with Trump’s $2.2 trillion COVID stimulus and President Joe Biden’s Inflation Reduction Act elevating national debt levels to record highs.
At the latest count, the U.S. was sitting on a debt-to-GDP ratio of 121%. The eye-watering $33.1 trillion figure means every American is in equivalent debt to the tune of $100,000.
As interest rates rise, that unfamiliarly high figure has started to spook analysts. Black Swan author Nassim Nicholas Taleb, who correctly predicted the 2008 financial crisis, worries debt could become the cause of a more predictable crisis for the U.S. government.
JPMorgan CEO Jamie Dimon said the U.S. needed to address debt levels before foreign owners of U.S. bonds staged a “rebellion,” while Fed Chair Jerome Powell said it was time for Americans to have an “adult conversation” about debt levels.
When did the U.S., the land of financial abundance and free-flowing credit, get itself into a mindset that has been more commonplace on the other side of the Atlantic?
Debt aversion
Major policymakers and think tanks are freaking out about debt in a way that would have seemed hysterical just a few years ago.
Prior to and in the early days of the COVID-19 pandemic, historically low interest rates meant governments were effectively benefiting from free money.
In the U.S., that has combined with historical factors like a strong dollar, a mighty economic growth engine, and consistent demand for the country’s bonds to assure policymakers that debt could always be worked off. But things aren’t as rosy as they once were.
That’s because most countries are dealing with the whiplash of massive public spending drives during the pandemic, now followed by the challenge of making those repayments amid rising interest rates to ward off generationally high levels of inflation.
Indeed, earlier in April the International Monetary Fund (IMF) sent a warning to the U.K. over its debt profile, highlighting it and Italy as two of four major economies that “critically need to take policy action to address fundamental imbalances between spending and revenues.”
Meanwhile, a genuine competitor to the greenback has emerged, following the rising influence of the BRICS bloc of Brazil, Russia, India, China, and South Africa, stoking the possibility of “dedollarization.”
Those pressures are forcing the U.S. into an uncomfortable conversation about its relationship with debt.
A cultural shift
However, it might also mark an unlikely cultural shift in how the U.S. perceives indebtedness. And that change in perspective could result in Americans increasingly resembling Europeans.
U.S. citizens have typically been more comfortable with debt, at least privately. In 2021, more than two-thirds of people in the country owned a credit card compared with about 38% of people in France, for example.
But the trends have been reversing since the onset of the financial crisis.
In the U.S., private debt as a percentage of GDP has declined from 99% in 2007 to 74% in 2022, according to data from the International Monetary Fund.
France’s private debt, meanwhile, has jumped from about 46% to 68% in the same time frame.
Several European governments have been historically more hawkish about their levels of personal and public debt.
Germany, for example, has a constitutional fiscal rule that limits deficits to 0.35% of GDP per year, though that can be extended during economic downturns. This rule has been enough to put a stop to projects in the past. Countries in the eurozone also abide by stricter debt rules.
Citizens across the continent are more prudent with their personal finances as well.
“It’s not just about public debt, but also private debt. They don’t like to be indebted,” Zareh Asatryan, corporate director of the Leibniz Centre for European Economic Research (ZEW) corporate taxation and public finance research unit, said of Germans.
“If you look at, for example, mortgage take-ups, only half of Germans own apartments. They don’t like to take mortgages and buy apartments.”
A 2015 Pew survey found there was also a generational shift in how Americans perceived debt. The survey showed 70% of baby boomers viewed loans and credit cards as opportunity-enhancing, while 60% of millennials felt the same.
“They experienced the Great Recession acutely: Millennials came of age during that period and saw how high levels of debt took a toll on households’ immediate financial security and prevented them from saving enough for later. And Gen Xers endured loss of housing wealth and other consequences of the recession at higher rates than many other Americans,” researchers wrote at the time.
French exit
According to the ZEW’s Asatryan, there is one crucial area where the U.S. continues to diverge from Europe, which means its fight over debt isn’t quite so urgent: economic growth.
The U.S. economy is expected to grow by 2.7% this year, according to the IMF.
However, it doesn’t look as if it’s been enough to quash debt. The country’s deficit jumped to 5.7% of GDP in 2023, a shift that might be the main culprit behind a recent uproar among analysts. Earlier in April, the IMF called on the U.S. to urgently address this deficit.
It’s also a dash over the figure in France, where panic over the country’s debt situation is going into overdrive.
France has turned heads in recent months as the country’s deficit widened to 5.5% in 2023, while economic growth moved at a meager 0.8%.
Economists at ING said a renewed focus on France’s troubling debt situation marked the culmination of a “spectacular turn of events,” all of which were bad news for the country.
Global rating agencies Moody’s and Fitch were both due to publish updated guidance on France’s debt on Friday.
“Ultimately, 2023 was synonymous with a marked deterioration in public finances. The official figures have not all been published yet, but France will find itself among the countries with the worst budget situation in the EU,” ING wrote.
The latter had already downgraded France to AA- last November, citing the country’s high level of government debt as a particular weakness.
A new panic over U.S. debt might mark the culmination of a longer turnaround in how Americans are approaching debt, both at a micro and macro level.
France’s current predicament, where investors are thinking twice about pouring their funds into the country, might give the country good reason to elevate those fears.
By Ryan Hogg
