Debt spiral

Debt is at highest historical points for governments, families and companies.

Only the USA has a 30T$ debt problem. The only way to solve this problem is simple: the USA needs a high average growth (let’s say 4-5%) while controlling the debt growth into a lower rate (let’s say 2%). The difference, sustained in time (20-30 years), could fix the problem as it did from 1945 to 1980 where strong growth enabled the USA to drop the debt from 110% of GDP to 25%.

But this scenario is not likely. Let’s take a look at the last 20 years US deficit:

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Only once, in 2001 there was a surplus, the rest of the years we had more deficit. Not only for the Black swans years of Pandemic Covid or the Financial crisis of 2008, the regular years where no big economic crash appears the US Government couldn’t close in surplus, and that’s really frightening.

The difference is that the US saw an average GDP growth of 4% from 1950 to 2000 and only a 2% growth from 2000 to 2022.

The impact of this huge deficit hasn’t arrived yet. Interest rates are hiking, FED has to increase rates to fight inflation but this will increase the cost of the bonds. If you combine a period of low economic growth and high-interest rates the US can fall into a debt spiral, where the interest will have to be prioritized over other spendings like social security, infrastructures, Medicare, etc.

It’s not a joke, take a look at this graph:

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In a long term scenario as of 2050, net interest could be more than Social Security and Medicare spendings so the US would have to reduce these costs with a heavy social impact.

As the PG Foundation estimates, by 2052, 40% of all the federal budget could go to pay the debt. Can you imagine running a country spending only 60% of your income? It’s just impossible.

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One solution could be Tax Reform. But increasing taxes of families and companies could reduce economic growth and politicians don’t like to take unpopular measures and avoid lobby pressure for a lack of long term vision. Tax increase is necessary, but reduces your international competitiveness. Tax reform should go with increasing competitiveness measures as I+D investments. The right path it’s not always the easy one.

But this is not an isolated US problem for two reasons: The US problem is not an exception, the debt problem is present in a lot of other countries. The major holders of US debt are other countries:

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That means that if the US government stops paying debt, Japan could face a 1.3T problem causing a chain reaction of unpayments.

What we really need is for the whole world GDP growth over the debt rates (including the interest rates) during a long period of time, a time in which no pandemics, no financial crisis or wars appears. We need 20-30 years of growth and calm. Without black swans. Not like we’ve seen in the last 20 years.

If you don’t believe this will happen, then you better look for a currency not vinculated to any state or government, a currency that doesn’t rely on debt, interest rates or central bank policies. A currency that could not be censored or seized. 

This currency is called Bitcoin.

Yours in crypto