WASHINGTON – The most disturbing thing about forecasts that the US national debt will hit $50 trillion by 2034 is that the true figure surely will be much bigger.
The Congressional Budget Office noted that the federal debt will hit 122% of gross domestic product a decade from now, dwarfing America’s fiscal position after World War II. Funding the biggest drivers – defense, social safety net outlays and giant tax cuts unmatched by revenue increases – will only become costlier over time. Never mind if a deep recession or serious military conflict further alters this trajectory.
This slow-motion economic disaster could be sped up by political squabbling or by de-dollarization efforts among top emerging markets.
Case in point: the November 5 US election. Even if Donald Trump loses to current President Joe Biden, there’s a zero-percent chance the former US leader and his army of supporters go away quietly. The risk of a Capitol Hill insurrection 2.0 looms large. The earlier one, on Jan. 6, 2021, provoked Fitch Ratings to revoke Washington’s AAA rating. Might the next prod Moody’s Investors Service to yank away the last AAA?
Nor are Biden’s China tariffs buttressing global faith in the dollar or US Treasury securities, of which Beijing holds nearly US$700 billion. Those tariffs include a 100% tax on China-made electric vehicles.
Such moves won’t prod Detroit to make the better automobiles that consumers in Europe, Asia or even many Americans want. They won’t raise America’s innovative game. They won’t increase Chinese leader Xi Jinping’s desire to work with Washington on climate change, military-to-military communications, counternarcotics, AI-related risks or even just basic economic cooperation.
Biden has intensified Washington’s sharp mercantilist pivot since 2017. Then-President Trump slapped huge tariffs on Chinese goods and on global steel and aluminum. When Biden arrived, he left Trump’s trade war in place — and continued to add new layers of China-targeted curbs.
Now, as Trump threatens 60% tariffs on all Chinese goods, Biden is trying to out-do Trump. This trade-tax arms race is drawing retaliation threats from Xi’s government. It also has Global South countries viewing the US less and less as an adult in room when it comes to economic and geopolitical affairs.
The most obvious example of disillusionment over US fiscal excesses is the pivot away from the US dollar. The predicament is made worse by the bull market in political polarization in the halls of Washington power as the US debt hits $35 trillion.
“The current fiscal trajectory could eventually push the debt-to-GDP ratio to a point where stabilizing it would require a fiscal surplus of a size that has rarely been sustained historically,” says economist Manuel Abecasis at Goldman Sachs. “And while the conditions for a fiscal consolidation to succeed are currently in place in the US, there is little political momentum for deficit reduction.”
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.
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.
“So long as you have Congress keep extending the debt limit and doing deals because they’re afraid of the consequences of doing the right thing,” Taleb says, “you’re going to have a debt spiral.”
As US political polarization hits a fever pitch, there seems little scope for a pivot toward fiscal sobriety. As Biden runs for reelection, his Democratic Party has zero plans for debt reduction. Nor do Republicans loyal to Trump, who are telegraphing giant new tax cuts.
“This makes me kind of gloomy about the entire political system in the Western world,” Taleb explains.
Former US Treasury Secretary Robert Rubin warns that fiscal challenges put the economy in a “terrible place.” Rubin tells Bloomberg that “the risks are enormous and some of them are materializing already, like higher interest rates.”
Rubin earned his fiscal bona fides in the early 1990s. Back then, as President Bill Clinton’s economic czar, Rubin struck a deal with the Fed: debt reduction in exchange for rate cuts. That led to a balanced US budget. Surpluses, too.
Now Rubin worries that the three-percentage-points surge in longer-term US yields is just the beginning. The fiscal outlook has darkened and inflation remains elevated. Rubin cautions that when markets are “out of sync with reality,” things “correct savagely.”
Sadly, the political climate on Capitol Hill leaves little reason for hope lawmakers can head off catastrophe.
“Looking forward, we’re having to deal with both spending and taxes,” Rubin notes. But “when you get realistic about it, I think you’re going to have to” focus largely on the tax side to increase revenues.
As Rubin sees it, “there’s a lot of talk, but the talk is always divided politically between the Republicans, who refuse to raise taxes, and the Democrats, who won’t do entitlements.” His conclusion about Congress or the White House tackling the deficit is that “I wouldn’t bet on it.”
Nor is it safe to bet on the US debt only rising to $50 trillion a decade from now. As the real figure exceeds even the worst expectations, global markets could be in a world of hurt. And Washington will make it easy for Global South nations hoping to sideline the dollar.