If the US debt bomb goes off, it affects everyone, including you. And here’s the story of how. In 1980, the US national debt per household was around $39,000. Now, in 2024, it’s over $260,000 per household, or $484,000 per child.
At the time of writing, the US debt has surpassed the staggering $35 trillion mark. That’s 10 trillion more since 2020. This year alone, the US will spend over a trillion dollars on just the interest payments alone. That’s more than its defense budget and almost the GDP of Switzerland. So why is this a big deal? Well it’s because this isn’t just a number on a ledger, nor just some wild facts.
It’s a very real problem and represents a mounting challenge to future generations. And it’s not just America that’s at risk. The exponential US debt is a crisis for the future global economy. If America can’t pay its debts, it’ll affect every single one of us. But the big question is, how exactly will this happen? In this episode, I’ll give you two sets of outcomes for America, one positive and one negative.
We’ll also learn who America is in debt to, why the debt is growing so quickly, and what can be done to avoid a complete financial disaster. All of that and more coming right up. You are watching Telfusion TV. Coming up next, we’ll explore the US debt crisis, how it happened and how exactly it could affect everyone, whether you’re an American or not.
But before that, did you know that there’s another crisis forming in online security? This year has seen a number of high-profile data breaches. Dell suffered a massive data breach exposing 3.9 million customer records, including sensitive personal information. AT&T had 11.5 million customers affected in two breaches.
Ticketmaster, 560 million customers affected. And the National Public Data had a breach of 2.9 billion records, including full names, addresses, dates of birth, phone numbers, and most importantly, social security numbers. Hacker groups can release this sensitive information online for free. It’s all getting out of control, so it’s time to take your personal information online seriously.
Meantime, the federal debt load snowballing in recent months. It’s reasonable to assume the next president is quite possibly going to face a debt crisis. You see the number, $35 trillion. Guess when we hit it? We should be very, very excited and proud of ourselves. We did something that so many economists said we would never get to this quick.
All right, so let’s break down the U down the US debt problem in simple terms first. The US government relies on the nation’s economic output to pay its financial obligations. Citizens and corporations work, get paid, and subsequently pay taxes. These taxes fund government spending such as the military, public services, social security, debt interest payments, and that kind of thing.
Imagine the government is a person with a credit card. If that person spends more money than they make, they’ll use their credit card to make up the difference, but eventually they’re going to have to pay that back with interest. The US government isn’t quite the same, but it’s similar enough for this example.
The government spends more than it receives in taxes, so it has to borrow to make up the difference, and this increases the debt. So, to continue functioning and making payments on their credit card, America has to borrow even more. But who does a country even borrow from? Hang on, we will get to that later.
Where things turn from a problem to a crisis is when the debt repayments become too much for a country’s GDP to even dream of supporting. is when the debt repayments become too much for a country’s GDP to even dream of supporting. Today, the US government’s spending has largely gone out of control, and tax revenues are nowhere near keeping up. It’s maxing out its credit card.
America’s debt-to-GDP ratio is 120%. This means that it owes more than it produces a year. This is the highest ratio in American history. It recently surpassed the levels seen in World War II. And that was when the country was fighting and funding the largest war American history.
It recently surpassed the level seen in World War II, and that was when the country was fighting and funding the largest war in history. Today there is no world war to fund, but the debt is still rising out of control. This has been called a sovereign debt crisis in the making. The term sovereign debt crisis is usually associated with emerging economies, but now it’s being uttered in the same breath as the words United States.
So how bad is it? On October 23rd, 1981, the US debt hit $1 trillion, a huge number. But it took 205 years, that is, from the founding of the United States in 1776, all the way to 1981, for the total US debt to hit $1 trillion. But now in 2024 alone, $1 trillion is just the cost of servicing the interest payments every single year.
Imagine a credit card with just interest payments of a trillion in a year. Even though former President Bill Clinton managed to balance the budget briefly in the late 90s, the momentum of debt accumulation was unstoppable. Since 1981, the debt has multiplied by 35 times. Just look at this chart.
You can see that the debt levels largely remained stable after World War II, up until the early 1980s, but then from the 2000s, it’s just been a runaway train. George Bush added $6 trillion with his Iraq and Afghanistan wars, the Obama administration’s 2008 stimulus added about $9 trillion, Trump $7.8 trillion with tax cuts and increased military spending, and Biden another $5 trillion from COVID recovery efforts.
The world is taking notice, and in June of 2024, the IMF stated that the growing US debt “Creates a growing risk to the US and global economy”. The US debt has been an expanding elephant in the room that no politician wants to touch. But to be fair, the principal $35 trillion amount isn’t the most pressing concern.
For example, other countries like Great Britain still have debt that hasn’t been paid off since the Napoleonic Wars. The real problem is those exploding interest payments combined with a lack of tax income. In the future, that runaway hockey stick at the end of this chart could break the back of the US government. The longer term is that we are at a point in which we are borrowing money to pay debt service.
And there is a process by which when you keep having debt growth faster than income growth, then that means that you have debt service encroaching on your spending. That’s the same for the government as it is for us. And as that happens, and you want to keep spending at the same level, there is the need to get more and more into debt.
And the way that works, it’s like it accelerates. We are at the point of that acceleration. As inflation kicked up after COVID, the Central Bank of the United States, the Federal Reserve, hiked interest rates to combat rising prices. The side effect was that the debt interest payments for the government also exploded.
These interest payments are actively sucking money out of the government budget, money that could be used for services like roads and basically any government spending that could help the nation. If interest rates are to stay elevated for any reason, it wouldn’t be good. If this continues and America can’t pay the interest on its debts and then defaults, how will this affect the world? Will the American dollar crash, followed by a depression? Let’s see.
Currently, the interest on the US debt is already the third largest item on the budget. Soon, that will be number one. On November 10th, 2023, the Moody’s Rating Agency changed the US credit rating from stable to negative. They see this as a major problem, and this is important, because it indicates the start of a lack of trust in America’s ability to pay.
Now, you might be wondering, could the US actually default on its debt? The technical and most realistic answer is no. The US can always just print money to meet its obligations, but there’s a catch. As Paul Krugman puts it, “hile the US can’t default in the usual sense, it can inflate away its debt, which is just another form of default.”
So the reasons why America can do this in theory is a story for another day. For a second, let’s travel 10 years into the future. What does it look like if this explosive debt trend continues? Things get worse and rumors and whispers begin to swirl. It dawns on everyone. The US government can’t possibly pay back the interest on the debt. As a result, it’s seen as a default.
What happens? Well, to explain that, we first quickly need to touch on the bond market. Many people don’t know this, but the US bond market is actually larger than the stock market, so it’s probably the most vital part of the global economy. A US government bond is basically just the US government writing a note to investors saying, I owe you with interest. Both private investors and countries buy US debt because it’s seen as a stable investment. It gives a small return on investment in the form of interest payments.
The interest payments that the US government makes allows the bond market to function. If the interest payments become too large and America can’t pay, investors would get worried about losing their money and they would lose faith in US bonds and sell them. But now, nobody else in the bond market wants them.
The US bonds become a flaming hot potato. US bonds would crash and bond interest rates begin to skyrocket. This next concept is critical, so I just want to make sure that it’s clear. As the risk of investors losing their money rises, the investors think to themselves, hmm, I don’t know if I’m going to get all my money back, so I want more of a return for taking that risk.
So, the bond market adjusts to reflect this. The investment return on US bonds, otherwise known as the yield or interest rate, suddenly shoots upwards, say from 4% to 25% in the span of a month. So what happens to the US then? Well it’s very complicated and uncertain, so I’ve divided the outcome into two sets.
One set of points are a good outcome from the US two sets. One set of points are a good outcome from the US, and the other set of points are a bad outcome. Let’s start with the positive one. Under the scenario that the US government can’t pay its interest on the debt, if investors still see America as America and not like an early 2000s Argentina, that is, a financial basket case, the following could happen.
Number one, an attraction of safe haven flows. Despite a US default, US assets might still be seen as relatively safe compared to other options. This could potentially attract investments, if the world and investors still believe that America is innovative.
Number two, fiscal stimulus. The government might respond to a crisis with significant fiscal stimulus, and that’s to support the economy. This will drastically reduce the value of the dollar, crash it even. A drastically lower dollar will no doubt hurt Americans, but the pain may not last long if this next point holds.
Number 3, a weaker dollar could make US exports more competitive internationally, potentially boosting demand for American goods, contributing to economic growth. If the core of America still knows how to produce quality products that are in demand, after the worst of the crash has happened, this boom could see a healthy recovery in time and that means higher tax revenue for the government to start paying its debt back. Remember how the last time the debt to GDP-GDP ratio was at these levels was back during World War II? Well, America thrived afterwards.
The dollar did get weaker, but there was still an economic boom, living standards rose, industry and economic output was strong. And number four, domestic investment. In response to higher interest rates, domestic investors might want to shift their investments from riskier assets back into government bonds. If the American government remains functional, the best thing the government can do is responsible spending in growth-producing sectors. Okay, so let’s look at the negative outcomes. If America doesn’t get its act together and is internationally perceived as a financial basket case, these options are less fun. Number one, crisis of confidence.
Defaulting on debt could severely damage confidence in the US economy. It’s possible that nobody would want US government bonds anymore, so they would yield high interest rates, but still wouldn’t have enough buyers. Think about it like a collapsing Argentina, where bond rates were high not because of a strong functioning economy, but because of perceived risk.
Crashing US bonds could lead to market volatility, reduced investment and much slower economic growth. Number two, higher borrowing costs. Increased interest rates would raise the cost of borrowing for domestic businesses and consumers. This would likely lead to less spending, investment and tax revenue. Number three, global repercussions. A US debt default could trigger turmoil in global markets. This would disrupt trade, financial systems and could hurt the US economy.
Number 4. The Fed overreacts. After watching interest rates and bond yields skyrocket, the Federal Reserve could overreact. They would try to force yields down by printing money and buying government debt.
They would have to print the most money ever seen in history to counteract the forces of people selling US bonds around the world. The aim would be to stop the price of bonds falling, but also stimulate the economy domestically due to lower interest rates. But of course, printing that much money would be inflationary, and it goes without saying that such a move would undermine investors’ confidence in US bonds further. So these factors could play out in complex ways.
It really depends on how each of these factors balance each other. If the US can’t pay its debt, it’s possible that all eight of these outcomes happen at the same time, but just to varying degrees. But when it comes down to it, it’s a matter of confidence in the innate capacity of American innovation. Do investors think that America can still innovate? Does the investors think that America can still innovate? Does the world think that America is still worth investing in? Or do they give up on the nation? We just don’t know.
So while the US can keep borrowing for now, it can’t afford to push its luck for too long. So what about the rest of the world? In this same scenario, if the US can’t pay off its debt, US bonds would crash, and bond interest rates begin to skyrocket.
So what, you might be thinking? Well, this is when the crisis begins to affect everyone in the world. Firstly, the shock of a US bond crash would drive global markets into panic. The largest economy in the world is too broke to pay back its investors. What a headline. Investors may pull out of everything altogether and just go for the safest options.
Commodities? Gold? Bonds of another country? Who knows, but whatever option the market chooses will shoot up in value. But everything else, all other markets, would drop like a rock with the massive amounts of uncertainty. Okay, so that’s markets, but what else could happen around the world? When US interest rates rise, it can cause a ripple effect in the economy.
Investors around the world often view US assets as a benchmark for safety and returns. When US rates go up, US investments initially become more attractive. To compete, other countries may need to start offering higher rates as well, as they want to attract investment. If they don’t, they risk inflation.
So how could US rates going up cause inflation in other countries? Well, here’s how it works. It becomes somewhat of a currency war. If a country doesn’t move their interest rate in response to the US rates shooting up, investors might take their money to the US markets to take advantage of higher returns, and this will depreciate the value of local currency, causing inflation.
In summary, this can cause an increase in interest rates around the world, causing inflation in other countries. That’s higher mortgages, and other loans for global businesses, and you and I. So in a default situation, what happens to those who bought US bonds expecting a return? Well this brings us to the question, who does the US government owe? The general answer is investors.
Countries like Japan, China and the UK. Then there’s central banks, commercial banks, wealth funds and other financial institutions. Some of the US public are also investors. And strangely enough, the US government owns itself. But how that works is also a story for another day. If there’s a US bond failure, all of these parties would lose a lot of money.
The chaotic fallout from such an event would be unparalleled. Some experts believe that as long as inflation stays low and the economy grows, high debt levels can be managed and the interest paid. The IMF suggests that it’s not the size of the debt itself that matters, but whether it’s sustainable in the long term.
But others, like economist Kenneth Rogoff, warn that if the US continues on this path, it risks losing investor confidence, which could drive up interest rates and put the global economy at risk. The US dollar is the global reserve currency. Any troubles in the bond market could crash the dollar and blow up the global economy.
Currency, any troubles in the bond market could crash the dollar and blow up the global economy. So the fact of the matter is this, when the US sneezes, the rest of the world catches a cold. Okay, so far, this future debt crisis scenario sounds terrible, but it doesn’t actually have to be this way. What America decides to do now could affect the future for the rest of us.
So, what can be done about it? So how does the US get out of this situation? Well, there’s four main ways that are likely. An economic boom, printing money, hiking taxes, and cutting spending. As you’ll soon see, one of these four could be done today with great success. But let’s start with the economic boom.
But let’s start with the economic boom. We already talked about the economic boom scenario in the first point of the positive outcomes section. We saw that there was economic growth after the higher debt to GDP levels during World War II. But there are still some differences. Back then, there was a lot of pent-up manufacturing capabilities that could easily just be converted into civilian applications.
That doesn’t really exist today. But still, in the future, after the economic pain of a debt blowout and a subsequently weaker dollar, a newfound competitiveness in trade could see a boom. But the success of that boom would all have to depend on how the crisis is managed by the Federal Reserve and the administration at that future time. Printing money.
The good news is that printing money means that there’ll be no more debt. The bad news is that there’ll be no debt because the currency is worthless. The US dollar is still used in 60% of international trade, and that’s thanks to its reserve currency status. But printing the massive amounts of money needed to get out of such a crisis could see hyperinflation, since the value of the currency would be eroded quickly.
Such an event for the US would send shockwaves throughout the global markets. So, if firing up the printing press is unfeasible, what about raising taxes? While this is technically a sound idea, currently the American consumer is struggling. Hiking taxes, especially in a weak economy, would be wildly unpopular for any politician.
Both of these factors make it an unlikely outcome. And lastly, cut spending. This option is probably the best and most feasible out of all of them. If the American government took a long hard look on how much money it was spending on useless items, they could become much more efficient.
It would be like finding hundreds of billions or even trillions in spare change behind the sofa. Yearly, the US government wastes an estimated $250 billion to almost a trillion dollars every single year. On the lower end, CNBC states that $2.4 trillion has been wasted over the last decade from simple payment errors alone. If the government got their act together, this would help the debt problem tremendously.
The US government has been looking at ways to cut spending over the decades. The Budget Control Act of 2011 was one attempt, but those caps were frequently overridden. So political will is needed. There’s one other idea to fix the problem, and it’s been floating around for a few years But it’s so stupid.
It’s hardly worth mentioning and this idea is the trillion dollar coin It sounds like something out of the movie idiocracy, right? But it’s a real idea and it goes as follows the US Treasury could mint a platinum coin valued at 1 trillion dollars They’ll deposit it at the Federal Reserve and use that money to pay off the debt. While it’s technically legal, how on earth would you convince a global market that this is legitimate? As we’re coming to the end of the video, in saying all of this, it’s not information for a reason to panic.
Such a debt crisis for the US would only be feasible in timescales measured in decades and not years. And if the government starts to cut spending now, there is a feasible way out of this mess. So today, the US is facing a perfect debt storm. High spending, low revenues, and rapidly increasing borrowing costs.
Historically, they’ve been able to navigate through tough financial situations, mostly thanks to the dollar’s dominant position in markets. But this time, it’s different. If the trend continues without major reforms, even a financial powerhouse like the US could find itself in deep trouble paying back investors.
To be clear, it’s not an immediate problem now, but in the next 10-20 years, it very well could be. As you’ve seen, the reality is highly complex and uncertain. But whatever the case, those in the seats of power in the US need to start making serious plans now instead of kicking the can down the road.
Cutting spending and reducing government waste is the best way to start. The debt clock is ticking. And that is where we are with the US debt situation. If you did like this piece, check out my episode on the 2008 crisis and how it still affects you today. It’s a good watch and is becoming more relevant by the day.
