Dire Consequences Await as U.S. Debt Nears a Tipping Point

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As U.S. debt as a percentage of GDP hovers at levels not seen since World War II, concerns are growing that the American economy is susceptible to a debt crisis in the near future.

Here's why people are worried: If interest rates return to normal levels of around 5% as the U.S debt approaches $20 trillion, then servicing that debt each year will cost taxpayers $1 trillion.

Does anyone think that the Federal Reserve, as the enabler of all this debt, will be in any rush to raise interest rates?

Following Europe's example, the U.S. debt-to-GDP ratio hit 105.6% in 2013, a perilous level that has long-term repercussions for the world's largest economy, according to Standard & Poor's. By 2016, right around the time that Hillary Clinton will be running in earnest to be president, the ratio will likely hit a staggering 111%.

But how much debt is too much debt? And what are the pitfalls facing the United States in the future? Both questions remain hotly contested among economists, despite a wide acceptance of a "tipping point" theory both by politicians and ordinary Americans.

Reaching a debt tipping point means that U.S. economic growth would remain substantially weaker than historical norms. That could lead to other dire economic consequences, such as inflationary pressures and a weak dollar.

With the U.S. borrowing $3 trillion in 2013 to service existing debt, it's important to examine what a high debt-to-GDP ratio means to the U.S. economy, and, more importantly, your money.

U.S. Debt:  The March to $20 Trillion

With a debt-to-GDP ratio above 100%, the United States still  maintains an AA+ credit rating following its first global downgrade in August  2011. But concerns about huge deficits and increasing borrowing levels have the  potential to put any credit rating in jeopardy, even one for an economy that  owns its own printing press and isn't afraid to use it.

This year, the U.S.  will run a budget deficit close to $850 billion, while it requires another $1.2  trillion in net-borrowing (the difference between new debt issued and debts  retired) to service and retire maturing debt.

Whether such outrageous  levels of debt will lead to a funding crisis is the subject of steep policy debate  among leading economists.

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  1. Doris Kelsey | August 14, 2013

    Wouldn't another option be to increase the GDP? That should be fairly simple. Agriculture is our largest industry. Double the prices farmers get! Yes, the corn in the $4 box would increase in value from 10 cents to 20 cents. Might even interest more people to start farming and help with the unemployment problem. We could also process our feral horses and sell the meat instead of warehousing them (to the tune of $80 MILLION/year) until they die and the meat lay in a ditch and rot. There is lots of waste in agriculture we could use to increase our GDP. We just need to get rid of Vilsack. What does an ex-Monsanto lawyer know about farming anyway?

    • Brad M | August 15, 2013

      Problem is, what would these increased prices do to demand and consumer habits? Once there were " victory gardens". This time around maybe they would be called "broke and hungry gardens". How would this also affect other segments of the ecnonomy as people paid more for food and fuel ( corn in ethanol ), that income would no longer be applied to other things. However, I appreciate any slap at Monsanto, thanks for that!

  2. Robert in Canada | August 15, 2013

    It is incredible that the US Dollar has held it's value against other currencies and commodities. Actually, it's kind of perverted.

    The Dollar and the US standard of living should, by all reasonable accounts, be at levels of Greece or Cyprus – or worse.

    No other country in the history of the world has gotten itself so hopelessly deep in financial trouble without going under. Yet the US has not gone under and continues to defy all logic and reason to the contrary.

    • George | August 17, 2013

      Robert, various writers claim that the US is doing everything in its power to cook the books to hide inflation. Google GATA, to see all the claims they make about the US and others artificially suppressing the price of gold and silver to prop up the apparent value of the US fiat currency. A lot of people are indeed wondering how long the US can continue to "defy all logic" and do what "no other country" has ever done. Sounds like a really great party!

  3. Some guy | December 17, 2013

    military might, plain and simple. The only reason is because no other nation has economically retaliated.

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