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America’s debt has grown to an incredible $35 trillion, and debt servicing costs now exceed $3 billion a day.
It’s the elephant in the room that no one wants to deal with – especially in an election year.
Meanwhile, the Federal Reserve is expected to cut interest rates soon, which could theoretically provide some temporary relief. But make no mistake: This will not solve the structural problems that are driving America into ever-increasing debt.
Interest rate cuts as painkillers
The expected interest rate cuts by the US Federal Reserve are likely to provide immediate relief.
Lower interest rates could reduce borrowing costs for households and businesses and make mortgages, loans and credit more affordable.
In addition, the U.S. Treasury could get some breathing room as lower interest rates would reduce the cost of servicing the national debt.
Sid Vaidya, chief investment strategist at TD Wealth, points out that rate cuts could help the government save on interest expenses, especially if the Federal Reserve continues to cut rates over the next 18 to 24 months.
However, the fundamental problem remains: the U.S. government continues to spend more than it earns, leading to persistent budget deficits.
In fact, the U.S. government has been spending more than it takes in since 2002.
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While interest rate cuts could reduce interest costs in the short term, they will not solve the core problems: unsustainable government spending and a tax system that is not keeping pace with the country’s financial needs.
The US budget deficit currently stands at 6.7 percent of GDP and represents a significant burden that cannot be resolved by interest rate cuts alone.
The avalanche effect of US national debt
U.S. debt has increased dramatically in recent years, partly due to the economic response to the Covid-19 pandemic.
While this increase in debt was initially necessary to stabilize the economy, it has now reached a level that is causing concern among investors.
Last October, the yield on 10-year U.S. Treasury bonds soared to 5%, the highest in 16 years, highlighting investor concerns about the trajectory of the country’s national debt.
The Congressional Budget Office (CBO) predicts an even more worrisome future: private investor debt could rise from 75.7 percent of GDP to 93.7 percent within the next decade, and by 2054 the public debt burden could reach 166 percent of GDP.
These forecasts underscore the urgent need to resolve the country’s budget deficit.
Despite these concerns, the U.S. Treasury continued to issue new debt, meeting strong demand.
This summer, investors eagerly bought newly issued government bonds, enabling the government to finance its growing debt.
The worrying thing is that this situation cannot continue forever. There is no guarantee that the government will be able to continue borrowing at this pace, and a sudden loss of investor confidence could trigger a financial crisis.
Historically, deficit spending has played a critical role in stabilizing the U.S. economy during times of crisis, such as the 2008 financial crisis and the 2020 pandemic.
However, with the economy now on more stable footing, persistently high deficit spending raises questions about the government’s ability to respond to future crises.
If another major economic shock occurs, the United States may have limited options for effective intervention.
The case of Liz Truss’s short term as British Prime Minister serves as a cautionary tale.
Truss’s proposal to cut taxes without making up for the revenue shortfall through spending cuts led to a sharp sell-off in British government bonds and forced her to abandon the plan, ultimately leading to her resignation.
The United States could face a similar situation if it tries to stimulate the economy without addressing its debt problem.
Debts make currency worthless
As debt increases, so does the risk of currency devaluation. The US dollar, the world’s reserve currency, is coming under pressure as investors become increasingly suspicious of the government’s ability to meet its financial obligations.
Ever-increasing government debt can lead to a loss of confidence in the dollar and trigger a devaluation that could affect purchasing power both domestically and abroad.
This growing debt burden and the potential devaluation of the US dollar have sparked interest among investors in alternative stores of value. This of course includes the often touted “digital gold” Bitcoin.
Because of its fixed supply, mathematical precision, and lack of central control, cryptocurrency is seen by many as a hedge against global currency devaluation.
In addition, other forms of currency hedging are becoming increasingly important as possible means of protecting assets from the risk of dollar devaluation.
Experienced portfolio managers are now looking for opportunities to position themselves on the long side of other currencies, such as the Swiss franc, which is often viewed as a “safe haven.”
The need for tax reform
The bottom line is that the current situation shows that a reassessment of US fiscal policy is urgently needed.
While interest rate cuts and currency devaluations may provide some short-term relief, they are no solution to the long-term problem of growing debt.
Without effective reforms, the United States risks falling into a financial crisis that could have far-reaching consequences for the global economy.
Many experts have raised concerns about the sustainability of the current approach.
The U.S. government will have to take on two trillion dollars in new debt this year alone to refinance existing obligations and cover new spending.
As foreign investors become more willing to buy U.S. debt, the burden is increasingly falling on domestic investors and possibly on the Federal Reserve itself.
Continuing to rely on the Federal Reserve to support the market is a risky strategy.
To get Congress to take decisive action on fiscal policy, behind-the-scenes discussions are needed.
This includes tackling the root causes of the deficit, such as uncontrolled government spending and a tax system that does not generate enough revenue.
Ultimately, governments need to start paying for things again and not live on borrowed money. It’s time to stop putting off the problem and face reality.
The $35 trillion debt crisis is not just a problem for Washington; it is a problem for all of us. The decisions we make today will determine whether we perish or survive in the years to come.
