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.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.