Washington's lavish deficit spending is sucking the life out of the global economy and fueling inflation, says Francois Villeroy De Galhau, governor of the Bank of France.

In an interview with Germany’s Borsen-Zeitung, De Galhau said there’s too much focus on the Federal Reserve, which is only part of the inflation problem.

“U.S. fiscal policy is the elephant in the room: it is not in the hands of the Fed, and could significantly affect the level of long-term interest rates,” he said, referring to the federal government’s spending measures.

“A large U.S. fiscal deficit tightens financial conditions and fuels inflation,” De Galhau explained.

Meanwhile, the IMF has warned that Washington’s endless fiscal deficits “could make the last mile of disinflation harder to achieve while exacerbating the debt burden.”

By constantly spending above its means, Washington has to issue bonds to raise enough capital to spend on government programs. According to IMF managing director Kristalina Georgieva, this distorts the global flow of capital.

“There is an opportunity cost to this money,” Georgieva said. “It doesn’t go to emerging markets where it can finance jobs and business opportunities for American companies.”

According to The Wall Street Journal, the U.S. government accounted for roughly a quarter of all outstanding debt issued by advanced nations. Fast forward to today, and that figure is about 50%.

Although economists say the U.S. is unlikely to default on its loans, there’s a growing risk that investors could become reluctant to buy the ever-growing stock of Treasury notes.

That means America’s dire fiscal situation won’t matter until it suddenly does.

A problem lurking in the background

In 2023, the U.S. deficit ran close to 7% of GDP as the federal government borrowed $1 trillion roughly every 100 days.

According to Paul Donovan, the chief economist at UBS Global Wealth Management, the absolute size of the debt isn’t the biggest problem, as many other countries have had higher debt ratios.

Perhaps the biggest issue is that, unlike many major economies, the U.S. isn’t taking decisive action to cut down on spending and reduce its national debt.

“The political polarization that prevents a policy for a sustainable deficit is a concern, but is probably more of a background worry for now,” Donovan told the Journal.

Although unsustainable deficit spending is not an issue at this moment, when it becomes so, it could be past the point of no return.

“The current unsustainable fiscal position will not matter until it matters, and then it will be all that matters and will affect bonds, stocks, derivatives, and the FX value of the dollar,” warned the U.K.’s National Institute for Economic and Social Research.

Based on IMF projections, the U.S. deficit will continue to grow at the same pace for at least the next five years. The IMF’s biannual Fiscal Monitor said the U.S. public debt could nearly double over 30 years.