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5 Consequences of US Debt at $50 Trillion

Interest-Rates / US Debt Oct 08, 2020 - 05:08 PM GMT

By: John_Mauldin

Interest-Rates

With the US set to breach the $50 trillion mark in debt by 2030, here are five things we should start thinking about sooner rather than later.

1. Raising taxes will not solve the problem. Of course, it could help reduce the deficit some, but it would be more of a token. That is just the reality. From the Tax Foundation, here are the real numbers as of 2017.


If we double taxes on the top 25%, it would only bring in another $1.3 trillion, assuming people didn’t change their behavior. (A 75% marginal rate plus 4% Medicare for a 79% top rate certainly will change behavior.)

A less-shocking 20% to 25% increase would only bring in about $3 billion to $400 billion, and would have to raise rates on incomes above $83,000.

Not exactly the rich. They already think they pay their fair share.

If we raise taxes next year in the teeth of a recession, it will only make the recession worse. If we raise taxes but they don’t actually take effect until 2023 and then get phased in? That would probably avoid creating a double-dip recession.

One reason we cut corporate taxes was to make US companies more competitive. It worked. Do we really want to lose that? Not to mention what it will likely do to the stock market. Just saying…

2. Debt is future income brought forward. There is a point at which debt becomes a drag on US economic growth, and we have likely reached it.

GDP growth in the US is going to increasingly look like Japan and/or Europe, i.e., almost nil. So, the CBO’s continued 2% average growth forecasts will simply get thrown out the window and the deficits will get worse.

Don’t shoot me; I’m just the messenger.

3. It is possible I’m being overly pessimistic about the need for a Great Reset which would include national debt. Japan reached 250% debt to GDP a few years ago, since which the Bank of Japan bought around half of total government debt (back of the napkin numbers), and Japan is doing just fine. The European Central Bank is buying anything not nailed down and is muddling through.

4. Let me point out that, while the practical results of quantitative easing look similar to modern monetary theory (MMT), the actual results and practice are completely different. I am not persuaded that the US Congress can understand the difference. Dear gods, I hope they can.

I was just explaining this to a friend. He asked me what we should do, somehow believing that there has to be an answer. There isn’t one.

We have no good choices left. It is as if we are on a trip through a desert and know for certain we don’t have enough water to go back.

We have to go forward, not knowing where the desert ends.

That’s the reality. Unless you want to cut Social Security and Medicare, ignore military pensions, sell the national parks, abolish departments like State and Treasury, cut the defense budget in half along with Homeland Security, Education, Labor, the Justice Department and the FBI, etc., we are going to have to live with the $2 trillion deficits.

In good years, too.

There are no better choices.

We are going to learn how much the US can borrow before it all collapses around our ears. I have no idea where that point is. It’s probably a lot more than any of us currently believe.

Japan is continuing to borrow, as is Italy and the rest of Europe. And China. Etcetera.

5. While all of this is happening, we will continue to see accelerating technological transformation. I believe within five years we will have something that looks like the Fountain of Middle Age, and within 10 to 15 years actually make you younger, while at the same time beating cancer, heart disease, and so on. It will truly be the age of technological marvels.

There are going to be phenomenal investment opportunities. We will have to be very conscious of how we handle our portfolios, especially toward the latter half of this decade.

That being said, I am currently making the largest percentage-wise single investment that I’ve ever made in a company (which is private so I can’t mention it) that I believe will have phenomenal dominance in its market within 10 years. It is one of the biggest markets in the world. Things like that are going to be happening more and more and more.

So yes, I fully understand that $50 trillion or even $60 trillion of US debt is a problem, but I’m not going to ignore the opportunities in front of me.

I fully believe that the 100,000+ entrepreneurs who have lost their businesses are not simply going to sit on their derrieres and do nothing. It is in their DNA to launch new ideas. They will keep creating opportunities and jobs.

I think of myself as a realistic, rational optimist. I can admit the problems that we have with our government, debt, and political partisanship and still want to be long humanity and believe in a powerful future.

You should, too.

The Great Reset: The Collapse of the Biggest Bubble in History

New York Times best seller and renowned financial expert John Mauldin predicts an unprecedented financial crisis that could be triggered in the next five years. Most investors seem completely unaware of the relentless pressure that’s building right now. Learn more here.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

John Mauldin Archive

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