1. Assuming the government continues as is, how long do you believe the US has before the national debt causes us to loose the global reserve currency status, experience a debt default and/or general currency failure?
An economist quoted in a recent
Wall Street Journal video said if the debt exceeds roughly 175% of GDP, then we're likely to be in a spiral where we "couldn't possibly raise taxes enough at that point to meet the interest payments". However, as noted in the video, it's really a matter of investor confidence. I.e. if bondholders foresee the U.S. reaching such a threshold, why should they not exit their treasurys and the US dollar
before the crisis rather than
after the crisis occurs? There's a musical chairs element at play here, where you don't want to be last, and where you're watching the behavior of other investors so that you don't wake up one day and see your account down 30%.
Overall, I think this 175% estimate is too high. Venezuela has a debt/GDP of "only" 146% and it's a basket case. Argentina is suffering severe deprivations under a 155% ratio, and perpetual hyperinflation boogeyman Zimbabwe is sitting at a mere 93%.
Greece ran into a bond market revolt in 2009 at about 130% and quickly spiraled above 200% by 2021. The deprivations of austerity and high taxation mean they are now
no longer considered to be a developed nation. Japan, with its 255% ratio might be an outlier because of how the government owns shares in the big banks that own government bonds, essentially directing a circular system of money printing and stagnation of the currency. The UK, currently at a 98% debt/GDP ratio, endured a bond market collapse just a few years ago when the markets lost confidence in short-lived prime minister Liz Truss.
So a crisis can strike anywhere, at any time, and at any level of debt/GDP above perhaps 90%.
2. If one of the situations in question one occurs, what do you think the corrective action(s) will be?
If bond prices collapse and yields get too high, expect the feds to step in with bond buying. Note that this injects currency into the economy and is thus inflationary. It's worked in the past, but there's a chance it won't work at these debt/GDP levels because buyers other than the government could become spooked by the money-printing. This could cause them to demand higher real yields to compensate for the risk of international dollar devaluation.
If the international value of the US dollar collapses, or inflation gets too high, expect the feds to hike interest rates. However this will only suppress GDP growth, potentially causing a recession, and even higher interest costs to the government, which will necessitate even more borrowing. Like the Quantitative Easing described above, this has worked in the past but might not work in the future if buyers other than the government become spooked by the effect higher interest rates are having on the US budget. At that point, the government is borrowing at successively higher and higher rates to cover its earlier debts.
In either case, a debt spiral could be set off that could quickly take the US's debt/GDP ratio from 125% to above 175% within just a few years. It happened in Greece.
Also in either case, expect American politicians to point the finger at someone. We seem to love that sort of performance here.
3. Assuming the government does not wait until one of the scenarios in question 1 occurs, what actions do you think the government will take to start reducing the national debt?
For five decades, voters have punished American politicians who promoted anything like fiscal restraint or a plausible path to controlling the national debt. We could neither raise taxes nor cut spending. So the consensus across both parties is that the US has to grow its GDP so quickly that the denominator outruns the numerator in the debt/GDP ratio. The U.S's current political recklessness looks a lot like the way Greek politicians handed out spending increases and tax cuts right up until their crisis hit. So the point is, the concept of something being done before the debt becomes a crisis is very, very low. Voters are ultimately to blame.
So I might expect another helicopter money stimulus program, paid to appease voters right before an election. This would be intended to stimulate the economy enough to avoid a bond market revolt around the election. This might be packaged as a retrogressive tax cut and a refund.
That said, in this era of social media propaganda, I think it is completely politically possible that Medicaid, Medicare, and Social Security could be chopped in half. The same population that can be manipulated by paid influencers into believing horse dewormer cures both COVID and cancer could also be manipulated into believing they'd actually be wealthier and more secure without these programs. Whoever controls the media controls the public's beliefs, and right now Republicans and right-leaning CEOs control the big tech information sources.
The particular possibility is cutting social programs AFTER some number of years in the future when a critical mass of baby boomer voters don't expect to be alive any more. It would be a classic boomer move for them to vote for that so that their bonds recover.
4. How do you think the general public would receive a budget that eliminated most of the existing tax cuts, eliminated or limited existing tax loopholes, increased taxes on the highest income bracket(s), taxed all capital gains (adjusted for inflation) at ordinary rates, doubled the Social Security taxable maximum earnings threshold, didn't add any additional tax cuts/credits, and reduced spending to some
degree in all spending categories as well?
If the Greeks and Turks are any guide, there would be riots in the streets. In Greece and Argentina, debt crises upended the existing political order and brought new parties into the system, but these were parliamentary systems, not US style duopolies.
In the U.S. movements occur within the two parties (or at least used to, in the case of Democrats). I think you'd see an anti-austerity movement from the Dems and a hard-money, tax-the-poor movement from the Reps.
5. Assuming the actions of question 4 are way too extreme or disruptive to the economy, what changes do YOU think could effectively start reducing our national debt and be generally acceptable to the public?
If the U.S. could go 20 years without fighting a war, that would dramatically help. This actually has a decent chance of happening, as the humiliation in Kabul looked a lot like the humiliation in Saigon, which led to almost 15 years of peace. That said, China invades Taiwan in either mid 2026 or mid 2027. I predict the Trump administration will refuse to fight China, and that may be for the best from a US-centric perspective, even though it will be a humanitarian disaster.
Other than that, I could imagine politicians passing a bill that imposes fiscal discipline far into the future. For example, a law could mandate an increasingly more balanced budget starting 5 years from now. Such a law would greatly increase the confidence of bond markets, while letting today's politicians off the hook. In fact, today's politicians could take credit for "doing something" even if they repeal the law due to circumstances in five years.
