Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

U.S. Debt Nears a Tipping Point, Dire Economic Consequences

Interest-Rates / US Debt Aug 14, 2013 - 02:43 PM GMT

By: Money_Morning


Garrett Baldwin writes: As U.S. debt as a percentage of GDP hovers at levels not seen since World War II, concerns are growing that the American economy is susceptible to a debt crisis in the near future.

Here's why people are worried: If interest rates return to normal levels of around 5% as the U.S debt approaches $20 trillion, then servicing that debt each year will cost taxpayers $1 trillion.

Does anyone think that the Federal Reserve, as the enabler of all this debt, will be in any rush to raise interest rates?

Following Europe's example, the U.S. debt-to-GDP ratio hit 105.6% in 2013, a perilous level that has long-term repercussions for the world's largest economy, according to Standard & Poor's. By 2016, right around the time that Hillary Clinton will be running in earnest to be president, the ratio will likely hit a staggering 111%.

But how much debt is too much debt? And what are the pitfalls facing the United States in the future? Both questions remain hotly contested among economists, despite a wide acceptance of a "tipping point" theory both by politicians and ordinary Americans.

Reaching a debt tipping point means that U.S. economic growth would remain substantially weaker than historical norms. That could lead to other dire economic consequences, such as inflationary pressures and a weak dollar.

With the U.S. borrowing $3 trillion in 2013 to service existing debt, it's important to examine what a high debt-to-GDP ratio means to the U.S. economy, and, more importantly, your money.

U.S. Debt: The March to $20 Trillion

With a debt-to-GDP ratio above 100%, the United States still maintains an AA+ credit rating following its first global downgrade in August 2011. But concerns about huge deficits and increasing borrowing levels have the potential to put any credit rating in jeopardy, even one for an economy that owns its own printing press and isn't afraid to use it.

This year, the U.S. will run a budget deficit close to $850 billion, while it requires another $1.2 trillion in net-borrowing (the difference between new debt issued and debts retired) to service and retire maturing debt.

Whether such outrageous levels of debt will lead to a funding crisis is the subject of steep policy debate among leading economists.

In 2010, economists Carmen Reinhart and Kenneth Rogoff released a well-known and highly regarded paper, "Growth in a Time of Debt." The authors concluded in their study that "median growth rates for countries with public debt over 90% of GDP are roughly 1% lower than otherwise; average (mean) growth rates are several percent lower."

Simply put, any nation with a debt-to-GDP ratio above 90% will have a lower-than-average growth rate. Like what we're seeing during the current Obama recovery.

In fact, in early 2013, economists David Greenlaw, James Hamilton, Peter Hooper and Frederic Mishkin concluded that even debt levels lower than 90% are risky. Their tipping point level: 80%.

Of course, other economists would argue no theorem can determine a detrimental level of debt. Rajeev Dhawan of Georgia State University made this very argument in 2010 while citing Germany's ability to roll over portions of its existing debt without any serious challenges.

Nonetheless, a tipping point is likely to develop, given the drag on the economy from servicing that debt in a low-growth environment.

Why economists are so pessimistic about debt is relatively simple, particularly in the face of increasing bond yields. If interest rates return to normal levels, say 5%, as the United States hovers in the near future around $20 trillion in debt, this means that $1 trillion must be taken out of the private sector each year just to service the debt.

As history has shown, the U.S. also has an alternative to limit its debt burden: inflation.

U.S. Debt and the Private Sector

The U.S. is not alone in this peril. Japan currently sits with a debt-to-GDP ratio north of 200%, with many expecting an eventual structured default to be the nation's only option. But the United States remains the world's largest economy, and our structural debt problems can have implications for the entire global economy.

Escalating U.S. debt has a profound impact on the nation's economy, particularly in the private sector, which takes its cues from government policy. The first major impact of growing debt centers on government's constant access to the global credit markets.

In order to finance existing federal debt, the Treasury Department crowds out private companies, making it more difficult or expensive for them to borrow money in order to expand operations.

And as huge levels of debt loom, the government affects private spending and saving, which can be detrimental to short-term growth as well.

With so much debt, it's clear that the government is going to have to either cut spending (austerity), which will drag down GDP without consumers and industry picking up the slack, or raise taxes. As a result, companies and consumers will likely spend less and save more of their money today.

There is no productive value to the economy in general from the money used to service the debt, which means that $1 trillion servicing a $20 trillion debt each year will simply disappear, a problem for a nation with trillions of dollars in unfunded liabilities on the horizon set to explode.

Such problems won't rear their head as quickly as long as interest rates remain low. That's why it's in the Fed's interest to keep rates as low as it can for as long as it can, even after it starts to cut back its quantitative easing.

But as more debt accumulates, global investors will expect higher returns to justify investing with a creditor with such a significant burden.

It's just a matter of time before the escalating U.S. debt will force our elected leaders to make very tough decisions on budgets and tax rates in order to service what we've already borrowed.

The U.S. debt crisis has trickled down to cities and municipalities, with Detroit and others already reaching the tipping point. Here's how that is shaking up the municipal bond markets.

Source :

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules