US Debt Moving Toward $50 Trillion Isn't Whole Story

Latest stories

US wants Taiwan to buy more kamikaze drones

US reputation on the line at Second Thomas Shoal Israel's Hezbollah war threat hurts Biden more than Trump

Abecasis adds that“the outlook for US fiscal sustainability has become more challenging over the last five years. Higher expected future interest rates in particular have substantially worsened the trajectories of the debt-to-GDP ratio and of real interest expense as a share of gross domestic product.”

Goldman's economics team reckons that the US debt-to-GDP ratio will hit 130% by 2034 from 98% now – fully 8 percentage points higher than the CBO estimates. But could it end up being far higher than that?

In a June 18 op-ed for the Free Press news site, historian Niall Ferguson views America's debt trajectory through a variety of financial prisms, both past and present. Most interestingly, he considers parallels between the collapse of the Soviet Union and the hubristic belief in Washington that titanically huge deficits don't matter.

Historian Niall Ferguson. Photo: LSE

As Ferguson writes:“A chronic 'soft budget constraint' in the public sector, which was a key weakness of the Soviet system? I see a version of that in the US deficits forecast by the Congressional Budget Office to exceed 5% of GDP for the foreseeable future, and to rise inexorably to 8.5% by 2054. The insertion of the central government into the investment decision-making process? I see that, too, despite the hype around the Biden administration's 'industrial policy.'”

Economists, Ferguson explains,“keep promising us a productivity miracle from information technology, most recently artificial intelligence. But the annual average growth rate of productivity in the US non-farm business sector has been stuck at just 1.5% since 2007, only marginally better than the dismal years 1973–1980.”

At present, he says,“the US economy might be the envy of the rest of the world today, but recall how American experts overrated the Soviet economy in the 1970s and 1980s.”

As the CBO admits, the share of GDP going toward interest payments on the federal debt will increase to twice the amount Washington spends on national security by 2041. That's partly thanks to the rising cost of the debt squeezing defense spending down from 3% GDP, now to a closer to 2.3%, 30 years from now.

“This decline,” Ferguson says,“makes no sense at a time when the threats posed by the new Chinese-led axis are manifestly growing. Even more striking to me are the political, social and cultural resemblances I detect between the US and the USSR. Gerontocratic leadership was one of the hallmarks of late Soviet leadership, personified by the senility of Leonid Brezhnev, Yuri Andropov and Konstantin Chernenko.”

By today's US standards, the later Soviet leaders weren't so old, Ferguson argues. Nor was the Soviet population, by some measures, appreciably less healthy than Americans today, he says.“The recent data on American mortality are shocking,” Ferguson says.

Life expectancy, he notes,“has declined in the past decade in a way we do not see in comparable developed countries.” He cites, too, a“striking increase” in deaths“due to drug overdoses, alcohol abuse, and suicide, and a rise in various diseases associated with obesity.”

The credit rating of the globe's biggest economy – and printer of the reserve currency – don't normally turn on such considerations. But, as Fergison argues, America is on a dangerous financial and socioeconomic course that few saw coming just a few years ago.

“I still cling to the hope that we can avoid losing Cold War II – that the economic, demographic and social pathologies that afflict all one-party communist regimes will ultimately doom Xi's 'China Dream,'” Ferguson says.

But, Ferguson adds,“the higher the toll rises of deaths of despair – and the wider the gap grows between America's [elite] and everyone else – the less confident I feel that our own homegrown pathologies will be slower-acting. Are we the Soviets? Look around you.”

In the short run, the Federal Reserve 's reluctance to cut rates is prolonging the“higher for longer” era for US yields.

“The harmful effects of higher interest rates fueling higher interest costs on a huge existing debt load are continuing, and leading to additional borrowing,” says Michael A Peterson, CEO of the Peter G Peterson Foundation.“It's the definition of unsustainable.”

Nassim Nicholas Taleb is even more worried. The author of the 2007 best seller The Black Swan: The Impact of the Highly Improbable thinks that a US debt“spiral,” coupled with political dysfunction in Washington, is a“white swan” risk in plain sight that could cost Washington its last AAA credit rating.

“The risk is right in front of us,” Taleb says.“If you see a fragile bridge, you know it's going to collapse at some point.” Taleb adds that“a debt spiral is like a death spiral. We need something to come in from the outside, or maybe some kind of miracle.”

Last November, Moody's Investors Service warned it might yank away America's only remaining top rating. That came three months after Fitch Ratings downgraded the US to AA+ as Republicans and Democrats brawled over funding the government. And 12 years after a Standard & Poor's downgrade amid partisan bickering over the debt ceiling .