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The Looming Threat of National Debt

Wealth Cycles
Jan 13, 2011

As the United States hurtles closer to the 100% debt to GDP mark—95.5% as of today—it becomes important to assess whether unsustainable national debt will be a chronic problem to plague the United States for generations to come. Even as Congress goes through the uniquely American tradition of grandstanding before consenting to raise the statutory debt limit, is there ever any real question that the debt limit will once again be raised?

Once we cross the 100% mark, we will join Italy, Japan, Greece, and Ireland as some of the world’s most profligate governments—putting the prosperity of the future in jeopardy in the process.

The Looming Threat of National Debt usnationaldebt copy

At the heart of the debt problem is a philosophical problem—should the pain and problems of private entities be shared by society? We at WealthCycles.com are not really prepared to answer philosophical questions, but we can state the facts and point out opportunities and pitfalls. Any objective observer could point out that over the past few years the business cycle turned downward as real estate prices fell, triggering losses in the stock market, and spiking unemployment. But what started as a business cycle downturn has mutated into a sovereign debt and currency crisis that lies not too far in the future.

So whether the answer to the philosophical question is yes or no, the United States has unequivocally decided to spread the pain of the private business sector to all facets of our society, whether taxpayers like it or not.

Lenders have continued to lend to the United States because of the U.S.’s size, wealth, political stability (which internal observers might question), and a 200-year history of paying its bills (mostly) on time. The United States also controls the dollar—the world’s reserve currency and premier trading unit.

But those credit-worthy qualities are beginning to crumble, as lenders—foreign and domestic—begin to question the United States’ maniacal obsessions with spending and abusing the dollar. The national debt, $14 trillion and counting, is beginning to constrict the United States as the burden of payment comes closer and closer.

The chart below shows that even though the U.S. doesn’t have the world’s highest debt levels (the blue bars) the average maturity of U.S. government bonds has sunk lower than that of any developed nation, to 4.4 years (the red dots).

The Looming Threat of National Debt maturity

What this means is that the United States has the shortest time until the principal on the $14 trillion comes due. While the U.K. has 13 years of grace and Spain has nearly 7, the noose is already beginning to tighten around the U.S.’s neck.

The U.S. 10-year Treasury interest rate has risen from 2.38% in early October to 3.34% today. One percent may not sound like much, but when interest rates rise, the U.S. government, and hence, taxpayers, must pay more just to maintain their debt.

When investors became afraid of the mess in Greece, they sold Greek bonds en masse, driving their 10-year interest rate from 6% to 13% in a single month in 2010. If the United States’ interest rates jumped 7%, taxpayers would be forced to pay nearly $1 trillion more in interest payments. If interest rates evenreached 7% (the 10-year Treasury’s average since 1970), U.S. interest payments would eat up 45% of the country’s tax revenue.

As the debt grows, the precarious position of the United State not only, but the position of the dollar also worsens —as well as the position of the world that depends on it.

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