America’s debt problem

Is America’s debt becoming unsustainable? This depends on various factors including: the rate of productivity growth, the shape of income inequality, the foreign demand for dollars, and the vicissitudes of the global bond market. In the USA borrowing costs are increasing by about 35% per year and with the Fed hiking interest rates to tackle inflation borrowing costs have gone from 0 to 5% over the past three years. The average interest rate on American government debt has risen from 1.6 percent as of 2021 to 2.1% today. This increase in borrowing costs reduces investment relative to consumption. Some interesting facts about the US debt.

• US is roughly 4% of the global population.

• US budget deficit today is 40% of the world’s budget deficits.

• US makes up 60% of the world’s current account deficits.

So 4% of the world’s population makes 40% of the world’s budget deficit (see graph below), 60% of the world’s current account deficit, which means that to keep the economy running, the US has to attract roughly between half and two-thirds of the world’s marginal increase in savings. If that money doesn’t gravitate to the US economy then there will be a problem with the debt or the US dollar. Are the numbers getting too big for foreigners to fund or even the US commercial banks. Or at least, it’s too big for them to fund with an inverted yield curve because why would US commercial banks run out and buy the long end of the yield curve when the yield curve is that inverted?

Sources: Mauldin Economics – Global macro update – 31st August 2023 The Atlantic – It Turns Out That the Debt Matters After All. 11th July 2023

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