Over the past 20 years, the IMF has not distinguished itself by its ability to predict major world economic turning points. It was caught flat footed by the 2008–2009 Great Economic Recession, it failed to anticipate the 2010 Eurozone sovereign debt crisis, and it was surprised by the US inflation surge to a multi-decade high of 9.1 percent in 2022. Its forecasting record has also been tarnished by the poor results of its two largest lending arrangements on record, namely to Argentina and to Greece.
Against this background, perhaps we should not be surprised that now the IMF is continuing to issue anodyne economic forecasts at a time when highly irresponsible US economic policies and heightened geopolitical risks pose a major threat to the US and world economic outlook. Indeed, instead of beating the drum about the major risks posed to the world economy by Trump’s One Big Beautiful Budget bill and his raising US import tariffs to their highest level in the past one hundred years, the IMF has increased its world economic growth forecast to 3.0 percent in 2025 and to 3.1 percent in 2026.
In their classic work “This Time it is Different: Eight Hundred Years of Financial Folly” Kenneth Rogoff and Carmen Reinhart chronicle the many countries that have had painful economic crises as a result of having gotten themselves onto unsustainable public debt paths. Now that the United States is on such a path, it is difficult to see how its economy too will not come to a sorry end as a result of its public finance excesses. This would seem to be particularly the case, considering that the United States is highly dependent on the kindness of strangers to finance its twin budget and trade deficits. Currently, of the $29 trillion of US Treasury debt outstanding, foreigners own $8.5 trillion or almost one-third.
It is difficult to overstate the degree of US public debt unsustainability. Even before Trump’s budget bill, the US was running a budget deficit of around 6.5 percent of GDP while its public debt in relation to the size of the economy was set to soon exceed its end of the second war level. Now following the budget bill, the Congressional Budget Office is projecting that the budget deficit will remain above 6.5 percent of GDP for as far as the eye can see, while the public debt to GDP ratio will rise by 2034 to a Greek-like level of 127 percent.
To be sure, if foreigners turn a blind eye to the US public finance deterioration and continue to buy US Treasury bonds at reasonable yields, a bond market crisis and a dollar crisis can be put off for another day. However, there would seem to be growing signs that foreigners are beginning to raise questions about the US’s willingness and ability to service its ever-growing debt mountain without resorting to inflation. Fueling those fears is the strong pressure that Trump is putting on the Federal Reserve to cut interest rates at a time when inflation still exceeds the Fed’s inflation target. Also, hardly inspiring foreign confidence are the Trump administration’s periodic musings about the merits of a 20 percent tax on Treasury interest payments to foreigners and the desirability of the forced conversion of foreign Treasury bond holdings into a 100-year zero coupon bond.
One sign of waning foreign investor confidence is the fact that since September 2024, the 10-year Treasury bond yield has increased by around 60 basis points. It has done so despite the Federal Reserve having cut its interest rate by 100 basis points and despite increased stock market volatility. Another is the fact that since the start of the year, gold prices have increased by 25 percent and the dollar has depreciated by 10 percent. This has occurred despite sharply higher US import tariffs and the widening of the short-term interest rate differential in favor of the United States.
The fact that the public finances of the United States, the world’s largest economy, are on such a dangerous path would be reason enough for the IMF to raise the alarm bell about the urgent need for an American economic policy reversal. This is all the more so the case in that the US budget deficit deterioration is not occurring in isolation. Rather, it is occurring at a time when the US is pursuing an aggressive and erratic trade policy that engenders economic uncertainty; the US stock market is trading at highly stretched valuations reminiscent of those that preceded the 2001 dot.com bubble; and highly unsettled geopolitical conditions, including the worsening of the US-China relationship, are a great cause for economic concern.