Whether USA has capacity to repay Debt?

USA’s Debt Conundrum

The Scope of National Debt

The United States' national debt, currently standing at $34.73 trillion, represents the total amount of outstanding borrowing accumulated by the federal government throughout the nation's history. This debt arises when the government’s expenditures surpass its revenues in a given fiscal year, resulting in a budget deficit. To cover this deficit, the government borrows money by issuing marketable securities, such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities (TIPS). The national debt encompasses both the cumulative borrowing and the interest owed to the investors holding these securities. Persistent budget deficits, which are common, contribute to the continuous growth of the national debt. To put it simply, the national debt is akin to an individual using a credit card for purchases without paying off the full balance each month. The cost of purchases exceeding the amount paid off represents a deficit, while accumulated deficits over time represent an individual's overall debt.

US government debt to top $54 trillion in next decade, by the year 2034 The CBO cited an aging population and rising federal?health care?costs as key reasons the national debt will soar over the next decade. Higher interest rates are also having a big impact on the government's expenditures. Starting next year, interest costs in relation to the overall economy will be bigger than at any point since 1940.

Factors behind the Debt Spike

Several notable events and policies have significantly contributed to the recent spikes in the U.S. national debt:

a)????? Military Engagements: The wars in Afghanistan and Iraq have cost taxpayers $2.4 to $3.0 trillion.

b)????? The Great Recession: In response to the 2008 financial crisis, the federal government spent $787 billion on stimulus programs to rejuvenate the economy.

c)?????? The COVID-19 Pandemic: From FY 2019 to FY 2021, federal spending surged by about 50% due to pandemic-related expenses. The estimated cumulative financial costs of the pandemic, including lost output and health reduction, range from $13 trillion to $16 trillion, roughly 90% of the annual GDP of the United States. The lost GDP alone is estimated at $7.6 trillion.

These events, along with tax cuts, stimulus programs, increased government spending, and decreased tax revenue due to widespread unemployment, have sharply escalated the national debt.

Debt-to-GDP Ratio

The U.S. debt-to-GDP ratio is a critical indicator of the national debt's sustainability. This ratio surpassed 100% in 2013, when both debt and GDP were approximately $16.7 trillion. As of 2024, the ratio has spiked to 124.7%. The increasing debt-to-GDP ratio underscores the growing challenge of managing national debt relative to the size of the economy.

Impact on Interest Rates and Inflation

Over the past decade, the national debt has consistently increased. Interest expenses remained relatively stable due to historically low interest rates and the perception of low default risk for the U.S. government. However, recent increases in interest rates and inflation are now leading to higher interest expenses, adding to the fiscal burden.

Public Concerns and Fiscal Policy

Public concern about federal spending is rising as the national debt continues to grow. The increasing debt and the associated interest payments are prompting calls for fiscal discipline and sustainable financial policies. Addressing the national debt will require a balanced approach that includes managing expenditures, optimizing revenue, and fostering economic growth to ensure long-term fiscal health and stability.

The growing national debt presents significant challenges that require careful management, strategic planning, and political will to ensure economic stability and prevent potential fiscal crises.

America’s reckless borrowing is a danger to its economy—and the world’s

USA’s Politicians are responsible for the Very High National Debt

The responsibility for the very high national debt in the United States can largely be attributed to the actions and decisions of its politicians over the past several decades. Here are some key factors:

Tax Cuts and Wars:

a)????? George W. Bush's Tax Cuts: The treasury lost about $1.5 trillion due to the tax cuts implemented during George W. Bush’s presidency.

b)????? Wars in Iraq and Afghanistan: These conflicts cost the U.S. approximately $2.1 trillion, with an additional $465 billion required to care for veterans of those wars.

c)?????? Trump's Tax Cuts: The Tax Cuts and Jobs Act, commonly known as the Trump tax cuts, resulted in a loss of roughly $2 trillion to the treasury.

Economic Crises and Stimulus Packages:

a)????? Great Recession: From the collapse of Lehman Brothers to the final year of Barack Obama’s presidency, the national debt increased from about one-third of GDP to roughly three-quarters. The financial crisis and subsequent economic measures significantly contributed to this rise.

b)????? Pandemic Relief Bills: Under President Biden, an unnecessary $1.9 trillion relief bill was secured just as pandemic restrictions were ending, further adding to the national debt.

Debt Accumulation by Presidential Terms:

a)????? Obama Administration: During Obama’s two terms, the national debt increased by about $9.5 trillion.

b)????? Trump Administration: Although Donald Trump served only one term, the total debt rose by $7.4 trillion from the end of fiscal year 2016 to the end of fiscal year 2020.

Political Polarization and Governance Issues:

a)????? Over the last 15 years, there has been a steady deterioration in governance, marked by increased political polarization and partisanship.

b)????? The contested 2020 election and repeated brinkmanship over the debt limit have further eroded confidence in fiscal management.

c)?????? The government’s failure to address fiscal challenges arising from growing mandatory spending has led to rising fiscal deficits and a growing debt burden.

Complex Budgeting and Lack of Fiscal Framework:

a)????? The “repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

b)????? Unlike most peers, the U.S. government lacks a medium-term fiscal framework and has a complex budgeting process, complicating effective fiscal management.

The high national debt of the United States is a direct result of decisions and policies implemented by its politicians. These include significant tax cuts, costly wars, economic crises, and stimulus packages. Additionally, increased political polarization, partisanship, and a lack of coherent fiscal strategy have exacerbated the problem, leading to the substantial debt burden the country faces today

Why Rating Agencies Still Keep US Sovereign Ratings High Despite Very High Debt Levels

Despite the high levels of national debt, rating agencies continue to maintain high sovereign ratings for the United States. This decision is influenced by several key factors, including the country's economic resilience, institutional strengths, and the unique role of the US dollar in the global economy.

Economic Resilience and GDP

One significant reason rating agencies keep US ratings high is the country's robust economic foundation. Many economists prefer to view national debt as a percentage of the U.S. gross domestic product (GDP), as this ratio reflects the country's ability to manage its debt. As one economist explained, "Compare it to a household. The higher the household’s wages, the more it can pay off its debt." The gross debt as a percentage of GDP reached nearly 128% at the end of Trump’s tenure, a historical high. However, the debt burden in relation to the size of the economy has been over 100% since 2013, a level unseen since World War II. This perspective underscores the ability of the US economy to support its debt obligations.

Historical and Institutional Strengths

The debt accumulated under specific presidents often reflects decisions made by their predecessors and Congress. For instance, policies from previous administrations and legislative actions significantly impact the current debt situation. Despite this, the United States benefits from strong institutions and a history of economic stability, which contribute to the confidence rating agencies have in the country's ability to meet its obligations.

Unique Role of the US Dollar

The US dollar's status as the world’s reserve currency is another critical factor. This unique position means that many global financial transactions are conducted in dollars, and US Treasury securities are considered some of the safest investments. This global reliance on the dollar provides a buffer against the immediate impacts of high debt levels, allowing the US to borrow at relatively low-interest rates compared to other nations.

Recent Developments and Ratings

Even though the US has faced significant fiscal challenges, including repeated debt-limit impasses, rating agencies have been cautious but generally optimistic about the country's creditworthiness. For example:

a)????? Fitch Ratings: Although the resolution of the US debt limit impasse allows the government to meet its obligations, Fitch Ratings maintains the Rating Watch Negative (RWN) on the US rating. They are considering the full implications of the most recent brinkmanship episode and the outlook for medium-term fiscal and debt trajectories.

b)????? Moody's Investors Service: On November 10, 2023, Moody's lowered its outlook on the United States' credit rating from "stable" to "negative." While Moody's reaffirmed the nation's top credit rating of AAA, the negative outlook indicates an increased risk of a downgrade over the next one to two years.

The rating agencies continue to assign high sovereign ratings to the US despite its substantial debt levels due to the country's economic resilience, strong institutions, and the pivotal role of the US dollar in the global economy. However, they remain vigilant and cautious, as reflected in recent adjustments to outlooks, indicating the need for careful monitoring of the US’s fiscal and debt management strategies in the coming years.

USA’s ability to repay its debt is a complex issue influenced by various economic, political, and financial factors. Here are some key points to consider:

Economic Strength and Debt Repayment Capacity

a)????? Economic Size and Productivity: The U.S. has the largest economy in the world, with a GDP exceeding $25 trillion. This economic strength provides a robust base for generating revenue through taxes and economic growth, which are essential for debt repayment.

b)????? Government Revenue: The U.S. government collects significant revenue through various forms of taxation, including income, corporate, and payroll taxes. These revenues are crucial for servicing debt and funding government operations.

c)?????? Debt-to-GDP Ratio: The U.S. debt-to-GDP ratio is high, currently exceeding 124.7%. While this ratio indicates a significant level of debt relative to the size of the economy, it is not unprecedented and is manageable compared to historical and international standards. However, it does highlight the importance of economic growth and fiscal discipline.

Monetary Policy and Inflation

a)????? Federal Reserve and Monetary Policy: The U.S. Federal Reserve plays a crucial role in managing the economy and controlling inflation. By adjusting interest rates and utilizing other monetary tools, the Fed can influence economic growth, inflation, and the cost of borrowing. This ability helps manage the debt burden by keeping interest payments under control.

b)????? Inflation Impact: Inflation can erode the real value of debt, making it easier to repay over time. However, high inflation can also increase borrowing costs and reduce purchasing power, complicating debt management. The U.S. has experienced relatively low inflation rates historically, but recent trends show higher inflation, which needs careful management.

Political and Fiscal Policy

a)????? Political Will: Effective debt management requires political will and cooperation. Bipartisan efforts to address fiscal challenges, such as reducing deficits and controlling spending, are essential. Political gridlock can hinder necessary reforms and exacerbate debt issues.

b)????? Spending and Revenue Policies: Fiscal policies, including government spending and taxation, directly impact debt levels. Policies that stimulate economic growth, such as investments in infrastructure, education, and technology, can enhance revenue and improve debt sustainability. Conversely, unfunded tax cuts or excessive spending can increase deficits and debt.

Global Financial Position

a)????? Reserve Currency Status: The U.S. dollar's status as the world's primary reserve currency provides significant advantages. It ensures a strong demand for U.S. Treasury securities, allowing the government to borrow at relatively low interest rates. This status reflects global confidence in the U.S. economy and financial system.

b)????? Global Investor Confidence: The ability of the U.S. to attract global investors to buy its debt is crucial. High demand for U.S. Treasury bonds indicates investor confidence in the U.S. economy and its ability to meet debt obligations. Any loss of confidence could lead to higher borrowing costs and increased difficulty in managing debt.

The U.S. has the capacity to repay its debt, but it requires careful management of economic growth, fiscal policies, and monetary stability. The country's economic strength, robust revenue generation, and the dollar's reserve currency status provide a solid foundation. However, political cooperation and prudent fiscal management are essential to ensure long-term debt sustainability. Addressing these challenges will help maintain investor confidence and the country's financial stability.

At What Point Could the US Default on Its Debt Obligations?

The question of when the United States might default on its debt obligations is complex and dependent on numerous factors, including economic conditions, fiscal policies, and geopolitical events. While the U.S. debt-to-GDP ratio is currently at 124.7%, experts suggest that this ratio cannot exceed 200% without risking default, even under today's generally favorable market conditions.

Debt-to-GDP Ratio and Comparison with Japan

The United States' debt held by the public cannot exceed about 200% of GDP without significant risks. This threshold is considered critical due to the differences in economic structures between the U.S. and other high-debt countries like Japan. Japan, for instance, sustains a higher debt-to-GDP ratio due to Government Debt is mostly domestic whereas US Debt has large foreign & Institutional Debt, a much larger household saving rate, which helps absorb its larger government debt. The U.S. does not have this buffer, making it more vulnerable to higher debt levels.

Timeline for Corrective Action

According to projections, the United States has about 20 years to take corrective action to prevent a default. If no significant measures are taken, the debt-to-GDP ratio is expected to reach between 175% and 200% between 2040 and 2045. At this point, no amount of future tax increases or spending cuts could prevent the government from defaulting on its debt, whether explicitly or implicitly through debt monetization leading to significant inflation.

Implications of Default

Unlike technical defaults where payments are merely delayed, a full-scale default would have catastrophic repercussions for both the U.S. and the global economy. Such an event would likely trigger a severe financial crisis, undermining the credibility of the U.S. government and causing widespread economic instability.

Worst-Case Scenario

While the baseline scenario allows for a 20-year window for corrective measures, several factors could accelerate the timeline, leading to a potential default within the next 5 to 10 years:

a)????? Geopolitical Tensions: Ongoing geopolitical tensions, including wars in Ukraine and Israel, tensions with Iran, and the potential escalation of the cold war with China, could lead to increased military spending and further strain on the U.S. budget.

b)????? Fiscal Policies: Persistent fiscal deficits and a lack of political will to address the underlying issues could exacerbate the debt situation. Election rhetoric and short-term political gains often overshadow long-term fiscal responsibility.

c)?????? Economic Shocks: Unforeseen economic shocks, such as another financial crisis or a significant economic downturn, could quickly elevate the debt-to-GDP ratio and push the U.S. closer to default.

The United States faces a critical period in managing its debt obligations. While there is a base case 20-year window (worst case 5 years) for taking corrective action, the potential for an accelerated timeline due to geopolitical tensions and fiscal mismanagement cannot be ignored. Addressing the root causes of the growing debt and implementing sustainable fiscal policies will be essential to prevent a default and ensure long-term economic stability.

Could a US Debt Default Unleash Global Chaos?

The Bedrock of the Global Financial System

US government debt is widely regarded as a cornerstone of the global financial system. As Simon French, chief economist at investment bank Panmure Gordon, explains, "It is seen as, usually, the single safest asset and essentially every other financial asset in the world is pretty much priced off of US government debt." The reliability and stability of US debt underpin many financial markets worldwide, making a potential default a catastrophic scenario for the global economy.

Impact Analysis

a)????? Economic Slowdown and Global Financial Crisis: A US debt default would significantly slow down the global economy. According to French, "It would make the global financial crisis look like a tea party," alluding to the 2008 crisis that nearly collapsed the world's banking industry. The US government would halt welfare payments and other support, severely impacting people's ability to spend and pay their bills. This reduction in consumer spending would lead to a broader economic slowdown, causing ripple effects across the global economy.

b)????? Rising Interest Rates and Unemployment: The ramifications of a US default would extend beyond American borders, making mortgages and other forms of debt more expensive worldwide. Interest rates on all types of debt are influenced by the perceived risk of US government securities. A default would represent a massive risk event, driving up interest rates on mortgages and public debt overnight. The increase in borrowing costs could lead to higher unemployment rates as businesses struggle with more expensive loans and reduced consumer spending.

c)?????? Inflation and Commodity Prices: The US dollar, serving as the world's reserve currency, is used to price essential commodities like oil and wheat. A US government default would likely cause the dollar's value to plummet. While a weaker dollar might seem beneficial for people outside the US, it would create significant uncertainty for investors in commodities. As French notes, "Investors in commodities wouldn't know how to price stuff," leading to volatile and unpredictable prices for essential goods, contributing to global inflationary pressures.

d)????? Impact on Pensions and Stock Markets: The US accounts for 60% of the value of global stock markets. Consequently, many people worldwide have exposure to American shares in their pensions, often without realizing it. A default would cause a sharp decline in US stock markets, severely impacting pension funds and individual savings globally. The financial instability would erode the value of investments, undermining the financial security of millions of people.

e)????? Lack of trust in Dollar to continue as Reserve Currency: Adversaries of US like China & Russia are already working actively on this by depolarization process and creating bilateral arrangements, BRICS nations are busy working out BRIC Digital currency. Many oil producing countries are also cooperating with this group and breaking away from extending Petrodollar arrangement signed with USA 50 years ago. Follow the money: Start with the mountains of debt. Britain’s public debt after the 1st World War rose from 109% of GDP in 1918 to just under 200% in 1934. America’s federal debt is comparable in magnitude. Britain’s state of mind was the product of a combination of national exhaustion and “imperial overstretch”, to borrow a phrase from Paul Kennedy, a historian at Yale. Since 1914, the nation had endured war, financial crisis and in 1918-19 a terrible pandemic, the Spanish influenza. The economic landscape was overshadowed by a mountain of debt.

f)?????? Threat to US’s Hegemonic status as sole Super Power: If US Dollar were to lose status as Reserve Currency, the next step could be US losing status as Sole Hegemonic Power (Super Power) as USA will lose credibility as Super Power. In this powerful and prophetic book, Cal Thomas offers a diagnosis of what exactly is wrong with the United States by drawing parallels to once-great empires and nations that declined into oblivion. Citing the historically proven 250-year pattern of how superpowers rise and fall, he predicts that America's expiration date is just around the corner and shows us how to escape their fate. Thomas suggests that dominant civilizations tend to rise, reach a peak, and then fall over roughly two and a half centuries. This cycle has been observed in the fall of the Roman Empire, the Spanish Empire, and the British Empire. Thomas argues that the United States, which declared independence in 1776, is now approaching the 250-year mark, a period he identifies as critical. Throughout history, empires have risen and fallen, each experiencing its own unique trajectory shaped by political, economic, social, and military factors. The time span of these empires varies greatly, reflecting their internal strengths and external challenges. “All a great power has to do to destroy itself is persist in trying to do the impossible.”-Stephen Vizinczey. In the age of affluence, Glubb says,?“there does not appear to be any doubt that money is the agent which causes the decline of this strong, brave and self-confident people.” During the final decades of their own empires, the Romans, the Ottomans and the Spanish all made celebrities of their chefs. Other symptoms common to empires in decline include massive disparities between rich and poor, an undisciplined and over-extended military, and a severe financial and economic crisis linked to a debasement of the currency. Great empire wealth dazzles, but beneath the surface the unbridled desire for money, power and material possessions means that principles of duty and public service are corrupted by leaders and citizens who scramble for the meagre spoils of an economic system which prioritizes the wrong things — and all at a time when human industry and ingenuity have been needlessly repressed. So many books and articles predicting American decline have been written in recent decades that “declinism” has become a cliché. But Britain’s experience between the 1930s and the 1950s is a reminder that there are worse fates than gentle, gradual decline. The majority of Americans, like the majority of Britons between the wars (WW 1 & WW 2), simply do not want to contemplate the possibility of a major war against one or more authoritarian regimes, coming on top of the country’s already extensive military commitments dictated by USA’s Military Industrial Complex.

US debt default would have far-reaching and devastating effects on the global economy. It would undermine the stability of the financial system, trigger a significant economic slowdown, increase borrowing costs worldwide, create inflationary pressures, and jeopardize the retirement savings of millions. The perceived safety of US government debt is integral to global financial stability, and a default would represent an unprecedented risk event with potentially catastrophic consequence

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