The $35-trillion elephant in the room: US debt is sinking America

America’s debt has ballooned to an eye-watering $35 trillion, and the cost of servicing that debt is now over $3 billion every single day.

It’s the elephant in the room that no one wants to deal with—certainly not in an election year.

Meanwhile, the Federal Reserve is expected to slash interest rates soon, which could in theory offer some temporary relief, but let’s not kid ourselves: this won’t fix the structural problems pushing America into deeper and deeper debt.

Rate cuts as painkillers

The anticipated rate cuts by the Federal Reserve are expected to bring some immediate relief.

Lower rates could ease borrowing costs for households and businesses, making mortgages, loans, and credit more affordable.

Additionally, the US Treasury might find some breathing space, as lower rates would reduce the cost of servicing government debt.

Sid Vaidya, Chief Investment Strategist at TD Wealth, notes that rate cuts could help the government save on interest expenses, especially if the Federal Reserve continues to reduce rates over the next 18 to 24 months.

However, the underlying problem remains: the US government continues to spend more than it earns, leading to persistent budget deficits.

In fact, the US government has been spending more than it earns since 2002.

Source: Tradingeconomics

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, currently at 6.7% of GDP, is a significant burden that rate cuts alone cannot resolve.

The US national debt snowball

The US debt has surged dramatically in recent years, partly due to the economic response to the COVID-19 pandemic.

While this debt increase was initially necessary to stabilize the economy, it has now reached a level that is raising concerns among investors. 

Last October, the benchmark 10-year Treasury yield spiked to 5%, the highest in 16 years, highlighting investor anxiety over the country’s debt trajectory.

The Congressional Budget Office (CBO) projects an even more alarming future: debt held by private investors could rise from 75.7% of GDP to 93.7% within the next decade, with public debt potentially reaching 166% of GDP by 2054.

These projections highlight the urgency of addressing the nation’s fiscal imbalance.

Despite these concerns, the US Treasury has continued to issue new debt, which has been met with robust demand.

This summer, investors eagerly purchased newly issued Treasury securities, allowing the government to finance its growing debt. 

The worrying part is that this situation cannot continue indefinitely. The government’s ability to keep borrowing at this pace is not guaranteed, and a sudden loss of investor confidence could trigger a financial crisis.

Historically, deficit spending has played a crucial role in stabilizing the US economy during times of crisis, such as the 2008 financial meltdown and the 2020 pandemic.

However, with the economy now on a more stable footing, continued high levels of deficit spending raise questions about the government’s capacity to respond to future crises.

If another major economic shock occurs, the US may find itself with limited options for effective intervention.

The case of Liz Truss’s brief tenure as UK Prime Minister serves as a cautionary tale.

Truss’s proposal to cut taxes without offsetting the lost revenue with spending cuts led to a sharp sell-off in UK government bonds, forcing her to abandon the plan and ultimately leading to her resignation.

The US could face a similar situation if it attempts to stimulate the economy without addressing its debt problem.

Debt makes currency worthless

As the debt continues to rise, so does the risk of currency devaluation. The US dollar, which is the world’s reserve currency, faces pressure as investors grow wary of the government’s ability to manage its financial obligations.

An ever-growing national debt can lead to a loss of confidence in the dollar, prompting a devaluation that could erode purchasing power both domestically and internationally.

For investors, this growing debt burden and the potential devaluation of the US dollar have sparked interest in alternative stores of value. Among them is of course the often touted “digital gold”, Bitcoin.

The cryptocurrency is being seen by many as a hedge against devaluing currencies worldwide, due to its fixed supply, mathematical precision and lack of centralised control.

Additionally, other forms of currency hedging are gaining attention as possible ways to protect wealth against the risk of a depreciating dollar.

Experienced portfolio managers are now seeking ways to get on the long side of other currencies, such as the Swiss Franc, which is often viewed as a “safe haven” currency.

The need for fiscal reform

The bottom line is that the current situation highlights the urgent need for a reassessment of US fiscal policy.

Rate cuts and currency devaluation may provide some short-term relief, but they are not a solution to the long-term problem of growing debt.

Without meaningful reform, the US risks facing a financial crisis that could have far-reaching consequences for the global economy.

Many experts have voiced concerns about the sustainability of the current approach.

The US government needs to secure $2 trillion in new debt this year alone to refinance existing obligations and cover new spending.

With foreign investors becoming less willing to purchase US debt, the burden increasingly falls on domestic investors and, potentially, on the Federal Reserve itself.

Relying on the Federal Reserve to continue propping up the market is a risky strategy.

Behind-the-scenes discussions are needed to encourage Congress to take decisive action on fiscal policy.

This includes addressing the root causes of the deficit, such as unchecked spending and a tax system that fails to generate sufficient revenue.

Ultimately, governments have to start paying for things again and not live through borrowed money. It’s time to stop kicking the can down the road and start dealing with reality.

The $35 trillion debt crisis isn’t just a problem for Washington; it’s a problem for all of us. The choices we make today will determine whether we sink or swim in the years to come.

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