Your #1 Guide for Online Share Trading

Your Advertisement Here? Contact Us For Rates (Sponsored Posts/Guest Posts Also Available)

The US Debt Crisis Explained

The US Debt Crisis Explained

Quietly, without any hullabaloo, the US national debt crossed the psychological $20 trillion barrier last year, effectively making the world’s largest economy one of the most debt-ridden nations in the world. To size that up, the United States’ national debt now stands at 105% of its GDP, in addition to over $700 billion in a federal budget deficit. But that is not the only debt that is worrying the US; personal debt is also becoming a pressing concern.

Since 2013, the national debt has equaled or surpassed the GDP. To put that in perspective, the last time that happened was in 1946, after World War 2, where a $271 billion debt was 119% of the GDP. However, unlike then, when the economy flourished thereafter and wiped out the debt, this time things look much gloomier. Government spending is spiraling, deficits keep increasing year on year, while the US Senate keeps on raising the debt ceiling.

President Trump campaigned on a platform of ‘No Debt’ and promised to lay out plans to pay off all the national debt within 8 years. But his latest economic policy runs on the principle that ‘debt is good’. The current blueprint envisions rising deficits up to 2020, but there is an even bigger problem ahead. The plan overlaps with the retirement of a sizeable number of baby boomers, who will now qualify for various medical and retirement packages, thus increasing government spending.

Meanwhile, creditors, who include China and Japan, are showing great concern for the US debt, with the dollar losing its value and treasuries seeing shrinking demand. To address this, the US is implementing a tightening schedule, which will not only see bond yields rising, but also debt servicing payments.

Away from the government, the US consumer is also facing dark times. After nearly a decade of easy credit, credit card debt last year surpassed highs of $1.02 trillion that was posted in 2008, just before the height of the global financial crisis. There are also further warning signs, with major providers reporting that they expect a rise in credit card defaults this year. The mortgage debt market is also rising, as are delinquency rates after a period of consistently ticking lower.

Student debt, which currently stands at over $1.5 trillion, suffers abnormally high delinquency rates at over 11%. Over 44 million Americans hold student debts and their productivity in the debt-ridden US economy will likely be hindered for many years.

Possible Impact of the Debt Crisis on the Economy

The impact of the impending US debt crisis has played out in a textbook manner thus far. As with any debt, there is short term benefit to both the economy and the public that is fuelled by deficit spending. There is spending on healthcare and infrastructure, which boosts the economy as well as increases jobs. But as the Debt/GDP ratio rises (as it is doing currently), creditors begin demanding more interest, which is essentially a price for increased inherent risk. An increasing Debt/GDP ratio also hinders demand for treasuries, which pushes interest rates higher, thus slowing down the economy.

Higher interest rates increase inflation, which will make the country’s exports less competitive in international markets, while imports will become more expensive. As such, demand for the USD will reduce, and the downward pressure on the greenback will continue.

Commodity prices are usually pegged on the USD, and as such, they usually have an inverse relationship with the currency. In such a recession regime, investors will also be incentivized to flock to safe haven commodities, such as gold and silver, to preserve their wealth. The precious metals, alongside oil and other commodities, should thrive under inflation and economic expansion.

The stock market will generally be under pressure, as higher interests limit investment and cut into corporate profits. But commodity-stocks in particular should remain favored in such an environment as commodity prices edge higher.

Ultimately, rising treasury prices will prompt the Federal Reserve to change tactics as an inevitable recession looms. Quantitative easing will likely be the new strategy, with the reactive Fed always seeking to throw money at problems. This will be followed by rate cuts leading to more inflation. This way, the USD will remain pressured, while commodity prices will continue to shoot up.

Final Word

The current US debt levels pose a significant risk to the economy. It is now more probable that the next recession will be debt inspired. The major problem with debt is that it demands continuous servicing, and America faces a double tragedy, with both national and personal debt at alarming levels. Recession will make investing in traditional markets a very risky endeavor. But savvy investors can take refuge in forex trading platforms where they can take advantage of declining markets by shorting various financial instruments for profit.

Leave a Comment