In this post, we’re going to discuss the national debt, that crossed $35 Trillion this week. In particular, we will discuss the tipping point of when the national debt spirals out of control, and we see a complete collapse of the dollar.
Now the US national debt recently crossed over $35 trillion dollars. This is obviously no surprise, but the numbers highlight just how dire the situation is in the United States.
To put things in perspective, right now Interest Payments on US National Debt Will be 1.14 Trillion this year in 2024. That’s a staggering 76% of income taxes being paid just toward interest on the debt expense.
The numbers around the debt continue to spiral and surpass expectations each year. For example, in 2021 the CBO projected the national debt would be 35.3 trillion in 2031. Today the CBO is projecting the national debt in 2031 will be 42.5 trillion.
So, we know the number is growing and growing quicker than expected. This raises the question around the tipping point? The tipping point again is when things spiral out of control as people and investors lose all faith in the US dollar.
Now the first thing to state about the Tipping point is that there is no magic number or statistic that will bring about it. Some economists say when the Debt to GDP ratio reaches 200%. In the US right now, the Debt to GDP is currently at 123%.
Debt-to-GDP is a ratio of the national debt to Gross domestic product and this number is significant because it shows the ability of a country to repay its debts. The higher it is the less confidence there is in the US dollar. This ultimately ties to the debt markets, as foreign investors will be less willing to lend to the United States. This of course means that’s yields on US bonds and notes will have to go up to entice investors to buy them. Ultimately though, this leads to more debt.
Some people believe we have much room to go in terms of Debt to GDP. For example, many people quote Japan and their high debt to GDP ratio as proof we are far out from a crisis. However, this thought process is flawed. This is because of Japan’s saving rate being much higher than the US. In other words, Japanese citizens buy government debt or Japanese bonds as many have been burnt in the stock market in the past. The Bank of Japan also buys massive amounts which keeps the yields low. Pensions buy JGB/bonds and all this allows the Bank of Japan to run this huge Debt-to-GDP ratio.
In the United States, things are different though. Most people don’t have much savings and those that do don’t invest heavily in US bonds. They invest in stocks. Most of US debt is owned by foreign investors. As long as we have foreign investors, yields will stay suppressed. We will probably see more central bank buying, but US debt is simply too large for them to take on.
In addition, foreign investors are not dumb though, they will either demand higher yields or park their money elsewhere. This is why a 200% debt to GDP ratio cannot happen in the US.
Now I recently read a paper from the University of Wharton which models the debt. It’s a good paper, pretty technical, and one of the key takeaways was that we have no more than 20 years before the tipping point occurs. They model several different scenarios in terms of what can happen and how fast we could see the tipping point happen. Keep in mind this is an academic paper, and these tend to be conservative when forecasting as well.
I tend to believe we have about 5-10 years. The currency won’t collapse but we will definitely see the effects and feel them much more.
Why doesn’t the national debt get more attention?
Now to me, I’ve thought a lot about why this issue, the national debt, doesn’t get more attention and I believe this has to do with education on the topic. Most people are not aware of the time value of money and exponential growth. Even more so, we’ve became accustomed to a massive debt in the US.
Now it appears the Trump is planning on tackling this issue from the GDP side of the equation. He hasn’t said this explicitly, but like most politicians he is going to attack the GDP side and try and boost GDP. This is possible and has been done before. We saw the Clinton administration in the 90’s run a budget surplus. While I’d prefer to see more focus on the debt side too, the fact is that I like how Trump is approaching this problem much more than Kamala. Kamala or whatever democrat becomes the nominee will try and drive GDP through fiscal spending; Trump will do it through tax cuts and trickle-down economics.
In my opinion, we have a much better shot at running a budget surplus with tax cuts than fiscal spending and wealth redistribution.
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