When Will US Debt Hit the Wall?

As I see it, the following are true:

  1. Debt is increasing far more rapidly than growth in the underlying economies that must support that debt. Although this is also true in Japan, the UK, and Europe, I’ll focus on the US.
  2. Revenue is increasing but less rapidly than debt. This is a problem.
  3. There will come a time when the interest payments on exponentially increasing government debt will exceed what the economy can support. Call that point “hitting the wall.”
  4. Higher interest rates will cause the US economy to “hit the wall” sooner. Lower interest rates merely delay the “day of reckoning.”

WHEN?

Examine the log scale graph of US government revenues for the past 30 years.  The exponential rate is about 4.6% per year.

Govt Revenue

Total official US debt is over $18 Trillion but some of that is “Intragovernmental debt” – such as debt to the social security program.  The remaining portion that is actually owed to pension funds, individuals, sovereign governments etc. is about $13 Trillion.  It is increasing rapidly, thanks to out of control spending far in excess of revenues.

Date                        Public Debt          Intragovernmental          Total

                                 In $ Trillions                    Debt                     Debt

9/30/2008                     $5.81                         $4.22                     $10.03

9/30/2014                   $12.78                         $5.04                     $17.82

Rate of Increase          14%                              3%                         10%

(annual)

It seems likely that revenues will decline in the coming recession, while expenses will probably increase for social programs, bailouts, and another war.  Assume revenues optimistically increase at the historical average of 4.6% per year and public debt only increases at 14% per year.  A more likely scenario is lower revenue and higher debt increases, for many reasons, not discussed here.

When does an economy “hit the wall?”

  • When interest expense exceeds revenues? Yes, but probably well before that.
  • When confidence in the currency and/or government fails?
  • When total interest expense exceeds say 1/3 of government revenue? Yes, or perhaps well before that point.

We don’t know.  Assume we delay “hitting the wall” until interest expense equals 1/3 of revenue.  But that is dependent upon the total interest expense which is determined by the blended interest rate.

Year            Estimated Revenue      Estimated Public         Implied MAX

                                                            Debt                             Interest Rate

2015                      $3.16                       $14.6                                   7.2%

2020                      $3.96                       $28.1                                   4.7%

2025                      $4.95                       $54.0                                   3.0%

2030                      $6.20                     $104.0                                   2.0%

 

Assuming that revenue increases 4.6% per year, public debt increases 14% per year, and that a maximum of 1/3 of revenue can be used for paying interest, the blended interest rate in 2030 cannot exceed 2%.  Washington, we have a problem!

Much can happen between now and 2030 and these exponential projections are unlikely to be realized.  The consequences of more QE, uncontrolled spending, more wars, and a weakening economy could be worse or better.

Regardless, if the maximum acceptable interest rate is 2% in 2030, or a few years before or after, there is a problem!

WHAT TO DO?

  1. Reduce spending. I’ll believe it when I see it.
  2. Increase taxes. Why use a Band-Aid to fix a broken leg?
  3. Hyperinflation:  Is the “cure” worse than the disease?
  4. Vote in new politicians. Really?  You actually believe that?
  5. Your call. What do you think?

This tiny exercise tells me that western economies are accelerating toward a wall, there are only a few years or perhaps a decade or two remaining before a major reset must occur, and that the time for delusional thinking is nearly gone.

What have you done to prepare for when one or many western economies “hit the wall?”  Gold and silver might be better answers than devaluing currencies, overpriced bonds, or levitated stocks.

Share your opinions in a comment and let others, including myself, learn from your thoughts.

 

Gary Christenson

The Deviant Investor

 

 

9 thoughts on “When Will US Debt Hit the Wall?


  1. Everyone seems to fear the coming apocalyptic economic collapse. Perhaps it’s only the words they fear. But it has to be; even adults require the experience for learning. That would include the experience of understanding first hand a bankrupt nation under full depression or what you have termed “hit the wall.” It’s prophecy: That which hath been is now, and that which is to be has already been. And the God requires that which is past.
    Ecclesiastes 3:16


  2. http://www.AE911Truth.org ,, Yes we have problems . 1.9 % Gay in USA and NPR says 4.3 Yes we have problems .
    Gold is for kings silver for gentalmen labor for poor debt for slaves ! That is why we have a student debt system for our university students. One of the most damaging things we have ever done . Oh yes our university’s are very
    Socialist . We are going down fast ! What’s next Guns !


  3. I have been wondering about this myself.How long can we print and borrow to stay afloat?
    What would happen if the Russians and the Chinese decided to come up with their own money standard? That was actually supported by something real,Like Gold. I’f the U.S. Cant print anymore IOU’S. Than the country is totally screwed,Overnight.
    What would make the Russians and Chinese do something like this? Well ,our current actions and military threats could make this a possibility.
    We really are a nation with little if any long term thinking. Stupid Empires do die.


  4. You need to revise this and explain why there is a problem, even though you think it is obvious.

    I presume the problem is that the US Govt cannot borrow all that money at such low rates and therefore will run out of money to pay interest on the debt and will therefore be insolvent. If insolvent it won’t be able to pay it expenses. If it prints the money out of this air, there will eventually be runaway inflation as in Weimar Germany.


  5. ‘Vote in new politicians. Really? You actually believe that?’ How about term limits and abolish elector parties
    All candidates run for themselves and the country–not big business


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