When Will the Bubble Burst?

Last September, the Congressional Budget Office (CBO) predicted the federal debt wouldn’t hit $29 trillion until 2028 and yet here it already stands at $28.7 trillion and is set to surpass $29 trillion within weeks.  That’s $86,036 for every single person in America.  And that figure doesn’t include the $1.2 trillion “infrastructure bill or the $3.5 trillion budget reconciliation bill which will more than likely be closer to $6 trillion. 

If you were to stack $100 bills on top of each other, one million dollars would be around the three feet mark, about the height of a chair or a toddler.  But, if you keep stacking the $100 bills, eventually past the peak of the world’s tallest building, going a little over half-a-mile into the air, you would reach one billion dollars.  To reach a trillion you would have to stack $100 bills into the stratosphere, past the International Space Station, 631 miles above Earth’s crust.  Now imagine 28 stacks of 631 mile-high $100 bills.  That’s America’s debt.

$28 Trillion is enough to cover a 4 year college degree for every high school graduating student for the next 68 years. $28 trillion is far more than the combined cost of WWII, the Korean War, Vietnam, and NASA’s space program from its inception.  Starting to get the picture?

By the end of this year the debt is expected of equal 102% of GDP, possibly reaching 202% by 2051.

Already there are estimates we will hit the $30 trillion mark by 2023, and between $40 and $50 trillion by 2031.  These figures are based on the assumption that interest rates on the debt will stay under 2% through 2027.  But that isn’t a given.  Just a 1% increase in the current rate would add an additional $400 billion a year cost on the interest which already averages about $1 billion a day. 

In order to finance this debt, the Treasury has to sell bonds.  Currently the interest rate on 10 year Treasury bonds is 1.29% which is great when compared to the average rate from 1990 to 2020 at 4.4%. But that pales in comparison to the 60 year average (1960-2020) of 6%.   If we returned just to the 4.4% average it will add an addition $1.2 trillion to the annual deficit.

In order to entice any one individual, country, business or private pension plan to buy bonds, the interest rate paid on the bond would have to outpace expected inflation.  In June and July consumer inflation averaged an annual rate of 8.4%.  Over the same 2 months, the producer inflation rate (cost to businesses) soared at an annual rate of 12.6%.  That certainly doesn’t seem like a good deal for anyone who would even consider buying our debt.

China currently holds slightly over $1 Trillion of our debt; Japan about $1.26 trillion; and the UK, Ireland and Switzerland holds about $7 trillion combined.  Intra-government borrowing (taking money from other government agency budgets and replacing it with IOU’s) make up another $6 trillion. The rest is held by mutual funds, state and local governments, private pension funds, insurance companies and banks.

Biden’s proposed tax increases on individual and corporate income would create an even greater increase in interest rates and further increase the national debt and deficit, leading to increased interest rates on mortgages, auto and personal loans, credit cards, and student loans.

High Government Debt Adds to Inflation.   Many heavily indebted countries try to solve their debt problem with increased inflation.  In theory, 50% inflation would reduce the value of the debt by 50%.  But lenders are unlikely to be caught off guard, and new buyers won’t buy bonds unless they have a high enough interest to protect them against hints of such rampant inflation. And, of course, high inflation comes with its own dire economic consequences.

The unique status of the dollar as the world’s reserve currency would make such an inflationary escape particularly costly.  In the face of high inflation rates, foreigners will sell their dollars and the dollar’s value will fall. That will make it more costly for us to buy goods from other countries. Foreign-held dollars will also come back to the United States, increasing the domestic money supply and causing further inflation.

The madmen who are responsible for the coming economic disaster continue to behave as if they can manage to avoid it. Violating Einstein’s definition of insanity, they continue to apply the same poison that caused the problem. These fools believe they can manage complexities they do not understand. The end is certain, only its timing is unknown, and, once interest rates begin to rise, and they will, it’s game over – begging the questions: How much longer can this go on? and What will happen to the US and the world when it does? Monty Pelerin, When the Bubble Burst

Source:  Our $28 Trillion National Debt Is Coming Due by John Lott, former senior adviser for research and statistics, U.S. Department of Justice, The Federalist;  What Will Happen If (and probably when) the U.S. Debt Bubble Bursts? By Lorimer Wilson, MunKNEE

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published. Required fields are marked *