Current national debt...
A brief history (simplified)...
We went off the so called gold standard in the 60s and early 70s. We began trading in dollar assets. We imported a bit more than we exported in the 70s, largely due to oil imports. The dollar fell in value, which prompted the circulation of more dollars and thereby inflation.
That led to the so called eurobonds (not to be confused with Euro Bonds). In this case the eurobonds were principally in deutschmarks, meaning the debt was to be repaid in deutschmarks, regardless of the trading value with the dollar... which was weakening against these eurobonds.
Famously, Paul Volcker dramatically raised interest rates, which propelled bond yields upward, with the resultant demand in dollar based debt instruments.
The era of the strong dollar, increased purchasing power for imported goods, which escalated. Normally, the profits from these imported goods, would have been repatriated to the exporting country currency, keeping the dollar vs foreign currency rather stable.
However creative ways and methods, including opening up U.S. companies, property, etc. to foreign entities. Of course, the early and easiest route was strong demand for U.S. debt. This continued until the early 2000s, when more and more U.S. property became the target and the attraction to Treasury debt became relatively stable. The dollar remained strong, as competing countries currencies weakened.
It became a necessity for everyone, to keep the dollar strong, as any weakening threatened the value of dollarized assets.
The graph above, indicates the timing of the various "QE" programs. The FED was basically absorbing the debt at the primary dealer market to keep interest rates low and inflation at bay.
When the "trust" hits zero, a hole of $300B~$400B will need to be somehow covered. Congress would need to authorize that additional expenditure.
Where will it come from?
- Additional debt creation, requiring ever increasing interest rates. Who will purchase that debt and at what premium, that will likely be spiraling upward?
- Could the FED enact a never before seen size of QE, in attempts to keep interest rates at bay?
- Will congress finally be forced to massively cutting spending?
As for #2: The FED in theory could enact a massive QE program, but it would require fiscal restraint by Congress. Remember that an unrestrained fiscal spending outlook, couple with a massive QE would eventually lead to undermining the entire financial system, which leads to same result as outlined in #1.
As for #3: Probably, once it is too late and public is clamoring for massive change.
All of that is extreme, but the "Trust" will be bust in 4th quarter of 2032, per the latest estimate. There is also a national election during that 4th quarter, as well.
If it goes bust, which I have spent most of this article predicting... an immediate and huge impact will hit the economy. Seniors that rely soley on S.S. trust fund income, will be in need of many of the other government programs, which will simply move the debt into those areas. Those that do not soley rely on the trust fund, will likely cut back on spending.
In the interim, goods and services will take a hit and industries will need to reduce spending (manpower) to bridge gap. Additionally, they may require loans to cover expenses, while the various product pipelines reduce inventories to a new reality. Just as the government is driving up interest rates on their bonds, notes, bills, etc. This is not just a U.S. debt problem, as the sum total of debt worldwide is increasing at a rapid rate.
If you think none of this can happen, just remember... we were here before, when everything was tiny, compared to today, and when there was a willingness to address the problems.
I would suspect that 2033 will be the year of reckoning, although significant cracks will be observed in the runup to that period.
