The debt of the United States has risen to an eye-watering 35 trillion dollars, and the cost for servicing this debt is now more than $3 billion per day.
In an election year, no one wants the elephant in the living room to be brought up.
The Federal Reserve is expected soon to cut interest rates, which in theory could offer some temporary relief. But let’s be honest: this won’t solve the structural problems that are pushing America deeper and deeper into debt.
Rate cuts as painkillers
The Federal Reserve is expected to reduce interest rates in the near future, bringing immediate relief.
Mortgages, loans and credit could be made more affordable for both households and businesses by lowering rates.
The US Treasury could also find some breathing room, as lower interest rates would reduce the cost to service government debt.
Sid Vaidya is the Chief Investment Strategist for TD Wealth. He notes that rate reductions could help the government reduce interest expenses, particularly if the Federal Reserve continues reducing rates over the next 12 to 24 months.
The underlying problem is that the US government continues spending more than it earns. This leads to persistent budget deficits.
Since 2002, the US government spends more than it earns.
While rate cuts may reduce interest costs in the short term, they do not address the core issues–unsustainable government spending and a tax system that has not kept pace with the country’s financial needs.
The US budget deficit is currently 6.7% of GDP. Rate cuts alone will not be able to resolve this burden.
Snowball effect of US national debt
The US debt has risen dramatically in recent years due to the economic response of the COVID-19 pandemic.
Investors are now concerned about the debt increase, which was initially necessary for stabilizing the economy.
The benchmark 10-year Treasury yield spiked in October to 5% – the highest level in 16 years – highlighting investor concern over the country’s debt trajectory.
The Congressional Budget Office projects an even more alarming scenario: private investor debt could rise from 75.7% to 93.7% in the next decade. Public debt could reach 166% of GDP in 2054.
These projections show the urgency to address the nation’s financial imbalance.
Despite these concerns the US Treasury continues to issue new debt which has been met by a robust demand.
This summer, investors bought newly issued Treasury Securities, allowing the Government to finance its growing debt.
This situation cannot last forever. The government’s capacity to borrow at this rate is not guaranteed. A sudden loss of investor trust could trigger a crisis.
Histoically, deficit spending played a vital role in stabilizing US economy during times like the 2008 financial meltdown or the 2020 pandemic.
The government’s ability to respond to future crises is questioned by the continued high level of deficit spending, especially now that the economy is more stable.
If another major economic shock occurs in the US, the US may have limited options for effective interventions.
The brief tenure of Liz Truss as UK Prime Minister is a cautionary story.
Truss’s plan to cut taxes, without compensating for the lost revenue by cutting spending, led to a sharp drop in UK government bonds. This forced her to abandon her plan and ultimately lead to her resignation.
The US could be in a similar situation, if they try to stimulate the economy while ignoring their debt problem.
Debt makes currency worthless
Currency devaluation is a risk that increases as debt continues to increase. The US dollar, the world’s reserve money, is under pressure as investors become more wary of the government managing its financial obligations.
A growing national debt can lead a loss in confidence in the dollar. This could lead to a devaluation, which could erode purchasing powers both domestically as well as internationally.
Investors are interested in alternative stores of wealth because of the growing debt burden, and the potential devaluation. Bitcoin, the “digital gold” that is so often touted, is one of them.
Many people see the cryptocurrency as a hedge to devaluing currencies around the world, due to its fixed availability, mathematical precision, and lack of centralized control.
Other forms of currency hedging have also gained attention as possible ways of protecting wealth against the risk a dollar depreciation.
Portfolio managers with experience are now looking for ways to be on the long side other currencies, like the Swiss Franc. This currency is often seen as a “safe-haven” currency.
Fiscal reform is needed
Bottom line, the current situation is a stark reminder of the urgent need to reassess the US fiscal policy.
Rate cuts and currency devaluation can provide some relief in the short term, but they do not solve the long-term issue of increasing debt.
Without meaningful reforms, the US could face a financial crisis with far-reaching implications for the global economic system.
Many experts have expressed concerns about the sustainability and effectiveness of the current approach.
To refinance current obligations and cover new expenditures, the US government will need to borrow $2 trillion this year.
As foreign investors become less willing to buy US debt, domestic investors and the Federal Reserve themselves may be increasingly burdened.
It is a risky move to rely on the Federal Reserve for market support.
It is necessary to have behind-the-scenes discussions to encourage Congress to take action on fiscal policy.
This includes addressing root causes of the debt, such as unchecked expenditure and a taxation system that does not generate enough revenue.
In the end, governments will have to pay for things again. They can no longer live on borrowed money. It’s time for us to stop putting off the inevitable and face reality.
The $35 trillion debt problem is not just a Washington problem; it’s our problem. We will sink or swim based on the choices we make now.
This post The 35-trillion-dollar elephant in the room: US Debt is Sinking America may be modified based on updates.
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