If people cared about the environment as much as U.S. debt,
we might have hit net zero emissions by now. But why think about the planet
when it’s easier to predict the collapse of the world’s biggest economy?
Every week or so, someone expresses deep concern
about rising U.S. debt. Recently, Robert Kiyosaki, then Elon Musk, and now
the CEO of Goldman Sachs, weighed in, urging trouble for the country.
To put it in perspective, the U.S. national debt is nearing
$36 trillion (about 119% of GDP). It has increased more than 8% in the past
year because of spending increases approved by Congress and the president.
Also, remember that in early June 2023, Biden signed a deal
to suspend the debt ceiling until January 1, 2025. This means the U.S. Treasury
can borrow as much money as it needs until 2025.
High interest rates, the rising cost of servicing that debt,
and the budget deficit currently between $1.8 trillion and $2 trillion (or 6%
to 7% of GDP) do nothing to help the situation.
Interestingly, just ten years ago, the Congressional Budget
Office (CBO) projected that in 2024, the debt would be at 78% of GDP and
wouldn’t hit 100% until 2039. Well, sometimes you miss the mark a bit…
Those who think things will get better after the election
are probably in for a disappointment. As Jim Rogers pointed out, neither Kamala
Harris nor Donald Trump seem interested in addressing the U.S. debt problem.
Neither plans to “tighten their belts” on spending. On the
contrary, they talk about easing restrictions. For example, the Republican
candidate wants
to eliminate some taxes, thus putting pressure on the budget.
The problem is that almost one-fifth of the taxes collected
will go to interest payments. Taking some of that revenue out of the equation
could cause the government even more headaches.
While the situation isn’t catastrophic — Japan, for
instance, has it even worse — budgetary appetites must be reined in, which
could eventually slow economic growth, thus negatively impacting the S&P 500 index.
The idea that the Fed can simply print money to pay off the
debt could result in a falling dollar (the consequences can be seen on the DXY chart), rising
inflation, and ultimately an economic crash, so that’s not a practical
solution.
In addition to the usual options of raising taxes and
cutting spending, another possibility is to keep inflation high, which would
devalue money and debt, although it would affect household welfare.