The US has been caught in a spiral since the debt ceiling debate, with the national debt increasing by more than half a trillion dollars in two weeks alone. While no one knows when the US will face a real debt crisis, there is no doubt that continuing on the same course will create problems in repaying the debt.
Data published by FiscalData on 15 June show that the US public debt has grown to $32.03 trillion. Compared with 1 June, it has increased by as much as USD 571 billion. US public debt is now larger than the combined GDPs of China, Japan, Germany and the UK. The debt per American household is $244 000.
At current interest rates, the US is paying nearly $3 billion a day in interest on its public debt. Recently released data showed that annualised interest payments on US public debt rose to $928 billion in the first quarter of this year. This is comparable to the national defence budget.
If every American household set aside $1,000 a month to pay down the national debt, it would take around 20 years to repay it.
Public debt continues to grow
The independent Congressional Budget Office (CBO) forecasts that the US national debt will rise to 119% of GDP by 2033 and 195% of GDP by 2053. Levels above 100 percent are generally considered unsustainable. In Europe, for example, the Maastricht criteria allow euro area countries to have public debt of up to 60 percent of GDP. The euro area average is currently around 92 percent.
Nigel Green, chief executive of financial advisory firm deVere Group, recently wrote that instead of falling, sovereign debt is much more likely to rise to $50 trillion:
The question to ask is: the debt is currently $31 trillion, is it more likely to go up to $50 trillion or down to $25 trillion? Ultimately, it is much more likely to get to 50 trillion than 25 trillion. So this situation is not going anywhere. It is not a crash now, but at some point America will have to pay back its debt.
The end of the long-term debt cycle
Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, said that the US has entered a very classic end phase of the long-term debt cycle, which will be accompanied by a crisis:
In the classic end of the debt cycle, there is a gap between supply and demand. In the classic ‘debt cycle’, there is a classic ‘cycle of default’. Too much debt is issued and not enough buyers. We all have to sell this debt to someone, but are there enough buyers? Many have already lost a lot of money on US Treasuries.
In addition, according to Ray Dalio, geopolitical changes are taking place that will have a major impact. Some countries are worried about sanctions, and there is a geopolitical shift where China is emerging as a world superpower.
If I look at the dynamics of supply and demand, there is a problem. There is a lot of debt and somebody has to buy it. If we continue on this path, in the next 5 to 10 years it is most likely that it will become very difficult to rebalance the situation.
Ray Dalio has looked at the rise and fall of empires and how this relates to the economy. He is the author of Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail. You can watch its summary video here.
Commentary by Tavex analysts:
The recent sharp increase in public debt and irresponsible government spending show that Americans have no plans to change course – it would mean too much short-term pain for the economy. The fact is that in two weeks they managed to increase the national debt by by more than half a trillion dollars.
Interest rates have risen substantially over the past year, and this has meant that bond investors have lost money (if the yield on bonds rises, the bond price falls, and vice versa). Higher interest rates again mean that new debt is increasingly difficult to service. There is also a trend towards buying up gold in the East and a cooling of interest in dollars. All of this suggests that a period is approaching when the US will have problems repaying its debt. In the long term, this will have major consequences for the dollar-based world monetary system.