The Trillion Dollar Risk
May 03, 2024Hey everyone, today we're tackling a huge topic in the financial world: "The Trillion Dollar Risk." It's about the current financial challenges facing the United States and how they could impact the global economy.
Interest Rates and National Debt
The Federal Reserve, led by Jerome Powell, recently announced that interest rates are expected to stay high for an extended period. For U.S. Treasury Secretary Janet Yellen, this means the cost of refinancing the nation's enormous debt remains high—a big problem that just keeps getting bigger.
As we move through this year, U.S. national debt is projected to exceed $35 trillion. Despite full employment, the International Monetary Fund (IMF) reports that the U.S. budget deficit is around 7.5% of the annual economic output. The IMF has sounded the alarm, stating, "This cannot continue," and highlights the spiraling U.S. debt as a long-term risk to financial policies and global financial stability. The situation is akin to a snowball system that only works because of the unique privileges the U.S. enjoys in global markets.
The Short-Term vs. Long-Term Outlook
In the short term, most experts see no serious problems with the U.S. managing its debt, but these privileges aren't set in stone. Recently, yields on ten-year U.S. Treasury bonds have risen sharply, last week hitting a high of 4.74%, edging closer to the stress level of 5% seen last autumn—the highest since the financial crisis.
The pace at which U.S. national debt is growing is staggering: since last June, $1 trillion has been added every 100 days, with an average of nearly $100,000 piling on every second in 2023. This trend is expected to continue. Projections by the Congressional Budget Office (CBO) indicate that the annual U.S. government deficit could rise to 8.5% of GDP over the next 30 years, from an average of 3.8% over the past decade. Interest expenses are the main driver of this increase. Debt could then amount to 166% of annual economic output.
No Easy Solutions
Frankly, there are no easy solutions left. To pay off the national debt at its current purchasing power, the U.S. would need to set aside 10% of its annual economic output every year for 80 years. This could trigger an economic depression that would impact four generations, an unfeasible and reckless disregard of the national debt that poses the greatest threat to the U.S.
Ultimately, everything boils down to credibility, particularly the political stability of the U.S. As long as investors believe that the U.S. government and the Federal Reserve have the situation under control, the U.S. can keep financing rising interest costs with ever-increasing debt. A Ponzi scheme can work for a very long time - until, for some reason, trust begins to fade.
This scenario outlines why it's crucial to stay informed and understand the significant risks and challenges in our global financial system.
As always, we'll keep watching and analyzing these developments here at Elevate. Stay tuned, stay educated, and let's navigate these turbulent financial waters together.