The Silent Spiral: U.S. Government Debt Projections and Political Apathy

Over the past few decades, debt crises have represented one of the main sources of political and economic instability, from the Latin American debt crisis in the 1980s to the European sovereign debt crisis in the aftermath of the 2008 financial meltdown. These crises often arose from excessive borrowing, fiscal mismanagement, and unexpected economic shocks, leading to severe recessions and necessitating international bailouts or austerity measures. The United States has historically maintained a relatively low dependence on debt to finance Government spending. But in recent years, it has increased to unprecedented levels, leading to a rising concern about its sustainability.

The nation is facing a significant fiscal gap, with federal spending at 23.3% of GDP and revenues at 17%. What is alarming is the apparent lack of interest around this issue in the political dialogue. Both candidates running for the incoming Presidential elections avoided the topic in their debates and programs. According to the Independent Committee for a Responsible Federal Budget, without any policy changes, the federal debt is projected to reach 125% of GDP by 2035. However, under Harris's policy proposals, the debt could rise to 133% of GDP, adding $3.5 trillion to the national debt. Trump's plans could exacerbate the situation further, potentially increasing the debt to 142% of GDP, an additional $7.5 trillion from current levels.

Economists are divided on how much debt the U.S. economy can sustain before it triggers severe repercussions. Some argue that as long as the dollar remains the world's primary reserve currency, the U.S. can manage higher debt levels due to lower borrowing costs and the ability to issue debt in its own currency, mitigating exchange rate risks. However, others caution that there is a tipping point.

One critical aspect to consider in this context is the U.S. debt ceiling, which is the legal limit set by Congress on the total amount of money that the federal government is authorized to borrow to meet its existing financial obligations. If the debt ceiling is reached and not raised, the government cannot borrow additional funds to meet its obligations, potentially leading to defaults on debts, delayed payments, government shutdowns, and negative impacts on the economy and financial markets. Neither Trump nor Harris has articulated a clear strategy on how to navigate future debt ceiling debates, which could have severe implications for the country's creditworthiness and financial stability.

Economists have debated the maximum sustainable level of debt, often referred to as the Debt Max, that an economy can handle before it faces severe fiscal crises. Surpassing this threshold increases the risk of a debt spiral, where borrowing costs rise, leading to higher interest payments and further borrowing. A study by the Penn Wharton Budget Model suggests that financial markets may not tolerate publicly held debt surpassing 200% of GDP. Economists Jagadeesh Gokhale and Kent Smetters warn that without corrective action within the next 20 years, the U.S. could face a scenario where no combination of tax increases or spending cuts would prevent a default, a catastrophic event with huge global economic implications. Even if such a crisis is avoided, the CBO forecasts a complicated future where, by the mid-2030s, all federal revenues would be consumed by Social Security and interest payments on the debt. This scenario would leave little room for essential investments in infrastructure, education, or responses to unforeseen emergencies like pandemics or recessions.

The reluctance of both Trump and Harris to address the debt issue is symptomatic of a broader political aversion to making tough choices. In an era dominated by populism, politicians are disincentivized to propose the necessary spending cuts or tax increases required to stabilize the debt.

Unfortunately, there is no painless remedy. Tackling the debt crisis will require a balanced approach involving both spending reductions and revenue enhancements. The longer policymakers delay, the more severe the adjustments will need to be. Leaders must engage in honest dialogue about the nation's fiscal health and for the electorate to support sustainable economic policies.