America: Paralyzed By Mounting Debts

Authored by Alex Deluce via GoldTelegraph.com,

In case anyone is still unaware, government debt is out-of-control.

It doubled under President Obama, and it is anticipated to increase for 50 percent in the next ten years.

It’s not just the repayment of debt that presents a potential crisis; it’s the interest payments. With a clear correlation between government debt and diminished growth, a natural first step would be for the government to ease its deficit spending on programs such Medicaid, Social Security, and Medicare to decrease the waste inherent in some of these programs.

Interest rates are expected to rise to $1 trillion during the next decade. That is more than the US spends each year on Medicaid and its military. It will cost $55,000 per household over the next ten years just to service debt. 

In addition to lower debt, the government needs to find new sources of revenue by eliminating spending loopholes and overall spending. Social security and Medicare will run out of funds, and these programs need to be restructured and managed more efficiently to ensure that they are available to future generations. Thanks to central banks pegging interest rates close to zero for nearly a decade, Amercian households are heavily in debt due to access to cheap credit.

The government’s increasingly high debts will leave an unsupportable burden for upcoming generations. If economic growth continues to decrease, there will be less income, and less tax revenue for the government to pay its debts. It is anticipated that the federal debt will grow by more than $13 trillion by 2030. Even if interest payments are made, there will be less funds available for security, infrastructure, and education. The once-great country of America appears to be on the decline, paralyzed by mounting debts it cannot handle.

Inflation is the normal response to high government debt. That is because inflation actually devalues outstanding debt, allowing the government to repay in devalued dollars.

To increase available funds, the US Treasury sells government bonds, and foreign governments are the largest purchasers. At of January, foreign investors own $6.35 trillion in US bonds, with China and Japan the largest investors, with a total of $2 trillion. When the demand for treasury bonds decreases, the Federal Reserve will need to increase interest rates, which increases the cost of borrowing. Even a slight decrease in bond purchases would have severe consequences on the value of US Treasury bonds. The demand for Treasury bonds is still robust, but the current debt spiral may lessen interest.

The Federal Reserve was not the only central bank that has been selling government bonds and lowering interest rates to stimulate the economy. It’s a tactic known as quantitative easing wherein central banks act as investors instead of regulators. The Bank of Japan announced that its accumulated assets at the end of November were 521.416 trillion yen. Its policy of quantitative easing has kept Japan’s interest rates near zero level and has even drifted into the lunacy of negative interest rates. 

Governor Haruhiko Kuroda has confirmed Japan’s goal for 2 percent inflation by 2019. The admission that the artificial economic stimuli may be coming to an end has not been easy, and it has investors confused. The Bank of Japan has historically bought numerous assets, from government bonds to real estate investment trusts.

The Bank of Japan embraced quantitative easing in 2013. By 2016, its interest rate fell below 0 (NIRP.) At the same time, it announced its plans to continue buying assets until inflation exceeds 2 percent. Its debt was 15 times the amount of its tax revenues. Japan’s policy has proven a huge failure. It has accumulated debts that comprise 253 percent of its GDP, a debt that is unsustainable.

Following the crash of 2008, The Bank of Japan followed the example of the US and bailed out its major corporations and provided them with low-interest loans. When that didn’t work, lending institutions were consolidated (think of the US bank mergers) and subsequently nationalized.

Government-approved policies such as quantitative easing allowed the unprecedented rise of Japanese debt to the point where it may never be repaid. Assuming no changes in tax revenues, Japanese interest debt alone will exceed its tax revenues by 2041. Quantitative easing has proven to be a failure on a global level.

President Trump’ plans to institute massive tariffs on steel and aluminum imports has caused uneasiness within the financial community. There is fear that exporting countries could retaliate by dumping its assets of U.S. Treasuries. As noted above, it is foreign governments who own the majority of US treasury bonds. The US has become dependent on this foreign demand of its bonds.

The tariff, on top of the recent tax cuts, comes at a bad time. It’s not known whether President Trump will institute these tariffs, and other countries are advising caution and restraint. While US consumers have been cheering the tax overhaul, the same could add $1.5 trillion to the country’s debt.

The US and Japan are reaping the consequences of out-of-control spending and manipulative economic practices. Unless policies change, these debts will become insurmountable, and major financial crises will be the consequence.