The Emerging National Debt Crisis

The U.S. debt ceiling was suspended for a year, and now it is back. The suspension was convenient in that it allowed the government to borrow at will for approximately a year. The new debt ceiling has been put at approximately $22.03 trillion (give or take a few million – who’s counting?).

Since the government isn’t likely to cease its massive spending, it raises the question of how to raise the pesky new ceiling. Secretary of the Treasury Steven Mnuchin has indicated that the ceiling must be raised to honor current debt commitments.

Few countries are able to publicly state that they are unable to pay their debts without this having an effect on their credit risk. When the U.S. reaches its new debt ceiling, it will lose the ability to borrow more money. The effect of this should strike fear in the hearts of Americans, but thus far, there’s been hardly a whisper of concern.

Twenty-seven percent of this massive debt is comprised of social security, Medicare, and various government retirement funds. People have paid into these funds and will expect payment. Foreign governments make up 30 percent of the U.S. debt, while the rest is held by pension funds, local governments, and savings bonds.

The government will be unable to raise its new debt limit without congressional approval. Given the current political situation, this will only result in a senseless political battle between Republicans and Democrats, with both parties plying their own agenda.

Borrowing automatically involves interest rates, which is currently one of the fastest growing portions of the U.S. budget. Increases in interest rates will affect all individuals with credit cards, mortgages, and other outstanding loans. Consumers and corporations will have difficulty making interest payments, let alone pay down their debts. This would likely bring on the next recession.

If the debt ceiling is not raised, another government shutdown may occur in a desperate effort to curb spending. Such a shutdown happened in December of 2018, with the result that the debt limit was merely pushed up to March of 2019.

In addition to problems with the national debt we are facing an unparalleled deficit concurrent with an economic upswing. The soaring deficit is partially due to President Trump’s tax cuts, which decreases government income but not its payment obligations. The deficit will probably reach $900 billion by the end of the year, and continue to rise to $1 trillion annually by 2022.

The ratio of debt to GNP is expected to hit 78 percent by the end of this fiscal year. This is double the average over the past five decades. The debt to GNP ration could reach World War II levels of 90 percent.

A continued increase in the national debt leaves the U.S. severely weakened in the event of a recession. The Democratic-controlled house is counting on the old “Gephardt Rule” to automatically increase the debt cap. This could work if there were enough revenue to make payments. Lacking revenues, the government would have to continue borrowing funds and keep increasing the debt. It’s a lose-lose proposition which will tank in our era of partisan one-upmanship.

When the fiscal year ends in September, Americans face another potential government shutdown. Our budget process is not working. Is a total government default in our future?