But it is not the size of the debt itself that is alarming, but rather the administration’s calls to spend even more—and this will inevitably lead to disaster, according to the Canadian newspaper *The Globe and Mail*.
The author points out that the U.S. federal budget deficit alone is approaching $2 trillion annually—nearly 6% of GDP. And by 2036, under current tax and spending policies, it will reach 9% or even higher.
Analyzing these figures, the publication points out that part of this $40 trillion debt consists of money the federal government owes to itself. Specifically, these are U.S. Treasury securities purchased by the Social Security Trust Fund using surpluses accumulated in previous years.
However, the Congressional Budget Office has calculated that even after deducting these reserves, the national debt amounts to “only” $32 trillion—which still exceeds 100% of GDP. And according to forecasts, this ratio will increase—to nearly 140% by 2036 and as high as 175% by 2056.
Growth of Unfunded Liabilities
The Globe and Mail notes that the reserves of the U.S. social security system are currently being rapidly depleted, and surpluses have long since given way to deficits. Funds are expected to run out entirely by 2032.
At that point, unless major changes occur, the government will have to meet its social security obligations using current tax revenues. And since these revenues are already “earmarked” for other obligations, this means the government will have to go even deeper into debt to cover the shortfall: specifically, an additional 3% of GDP annually by 2056.
The Social Security Trustees have estimated that the present value of unfunded liabilities in this area over the next 75 years will total approximately $29 trillion.
“If you add it all up, the debt comes to nearly $70 trillion. But even that’s not the whole story. If we factor in the unfunded liabilities of the Medicare program (as the U.S. government’s health insurance system for the elderly and low-income individuals is called), that adds another $60 trillion to the total; and the pension plan for federal civil servants, civilian employees, and military personnel—another roughly three trillion (plus a bit over nine trillion dollars) in unfunded health care benefits for those same employees,” the publication writes.
If we add to this the debts of state and local governments, amounting to about $3.7 trillion, and the unfunded liabilities of their pension plans (around $700 billion), the approximate debt of the U.S. public sector would reach about $146 trillion. That is four times the country’s GDP, the publication notes.
The Cost of Debt Is Rising
Buyers of U.S. government bonds have begun to take notice of this situation with U.S. public debt, according to The Globe and Mail.
The yield on 30-year U.S. Treasury bonds had been falling during the 40-year period of deflation since the early 1980s, but has recently begun to rise again. Currently, this figure has surpassed 5.2%—the highest level since 2004.
“Market participants anticipate that at some point the U.S. will attempt to extricate itself from its debt trap through inflation, repaying creditors with devalued dollars. The interest rate they demand to hold U.S. debt is adjusted accordingly to protect themselves from this risk,” the publication notes.
Be that as it may, this is fraught with all sorts of problems. The higher the interest rate on the debt, the more the U.S. government will have to pay its creditors—and the faster its debt will grow. Today, interest payments on U.S. public debt amount to about 3.3% of GDP. In 30 years, according to forecasts, they will nearly triple as a share of GDP.
“At 10% of GDP (and that’s still a ‘best-case’ scenario!), interest payments will ‘eat up’ more than half of all federal revenue. (By comparison, at the height of Canada’s debt crisis, interest payments accounted for 36% of federal revenue.) With even higher interest rates… well, it’s too terrifying to even think about,” notes The Globe and Mail.
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