While the human tragedy in Gaza is paramount, the conflict has real, though indirect, consequences for the U.S. economy, specifically our massive $34 trillion national debt and even the once-unthinkable risk of default. Here’s how:
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Direct Spending Fuels the Debt: Billions in new U.S. military aid add directly to the federal budget deficit. This spending is financed by borrowing, which increases the national debt, making an already unsustainable problem worse.
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Higher Interest Payments Strain the System: The conflict risks wider regional instability, which can spike oil prices and inflation. To fight inflation, the Federal Reserve may keep interest rates high. This dramatically increases the interest the U.S. government must pay on its existing debt, diverting funds from critical domestic needs and pushing the budget closer to a crisis.
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Eroding Confidence and the Default Specter: This is the critical link. The U.S. can manage its massive debt only because global investors trust it will always pay its bills. This conflict, by fueling global uncertainty and eroding trust in U.S. leadership, could shake that confidence.
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If investors (foreign and domestic) start to see the U.S. as an unreliable partner due to geopolitical turmoil, they may demand higher interest rates to buy our debt.
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A loss of confidence makes it harder and more expensive to borrow, accelerating a debt spiral. In a worst-case scenario, a severe loss of faith could lead to a technical default, where the government is temporarily unable to make all its payments, or a debt crisis, where servicing the debt becomes politically or economically impossible.
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In short, the war in Gaza creates a chain reaction: aid increases the deficit, geopolitical risk threatens higher interest rates, and the resulting erosion of global confidence makes the unthinkable—a U.S. debt crisis—slightly less so.