With the debt ceiling debate in full swing, many Americans are concerned about what comes next.
The truth is, it’s a true damned if you do, damned if you don’t moment where failing to raise the debt limit would cause the U.S. to default on its debt obligations. This could make it difficult (or nearly impossible) to fund all of our government programs and future financial obligations.
But if we keep kicking the can further down the road, we could also see major long term consequences that could destroy our way of life. We could see a debt crisis that sink the value of the U.S. dollar or potentially spark extreme levels of inflation.
Here’s the problem…
Right now we are quickly approaching $32 Trillion in national debt.
That’s nearly $250,000 per U.S. taxpayer, if you can believe it!
This is an astounding number any way you shake it.
In a recent social media post…
Billionaire Ray Dalio warned that the debt-ceiling debate sets the stage for a “disastrous financial collapse.”
The Bridgewater Associates founder argues that politicians will keep raising the debt limit but it isn’t a good long-term solution.
He said that debt ceiling negotiations will basically result in pledges to cut the deficit in the future, but doesn’t believe that will actually come to fruition. Why? Because it never does, of course.
His post went on to say…
“Increasing the debt limit the way Congress and presidents have repeatedly done, and most likely will do this time around, will mean there will be no meaningful limit on the debt. This will eventually lead to a disastrous financial collapse.”
President Joe Biden and House Speaker Kevin McCarthy have recently expressed optimism regarding a potential agreement on the debt limit to avoid default. However, Ray Dalio believes there is a more pressing issue at hand.
Dalio argues that the United States’ long-standing practice of spending more than it earns and financing the deficit through debt is neither sustainable nor the prudent choice he would make given the opportunity.
Looking ahead, Dalio emphasizes that this decision will eventually render it impossible to offer investors a sufficiently high interest rate to entice them to hold debt assets, while simultaneously maintaining low interest rates for borrowers to manage their debts effectively.
“When debt assets and liabilities reach the point that the amount of debt sold is greater than the amount of debt that buyers want to buy, central banks are faced with a choice: they either have to let interest rates rise to balance the supply and demand, which is crushing to debtors and the economy, or they have to print money and buy the debt, which is inflationary and encourages holders of the debt to sell the debt, which makes this debt imbalance worse.”
In Dalio’s view, both outcomes contribute to a looming debt crisis, with government bonds being offloaded on a large scale. Failure to increase the debt limit would also unleash financial chaos and societal unrest across the country and potentially the world.
Dalio claims that resolving this dilemma requires a bipartisan plan that addresses the fundamental issues within the financial system.
Merely applying a temporary solution to buy more time, as has been done 78 times in the past, will only perpetuate existing problems. Thus, a “smart bipartisan plan” must be developed, which will require sufficient time for careful consideration, Dalio argues.
He concluded his post with the following statement.
“I hope to see the smart bipartisan moderates band together to fight the extremists of both parties. I think that the leader(s) who come out in favor of this kind of smart bipartisan path should receive huge bipartisan support rather than the alternative path of not finding a smart bipartisan approach, which assuredly will lead us toward disaster.”
Let’s take a closer look at how bad the debt issue really is…
According to Fox Business, “Interest payments on the national debt will reach $1.4 trillion annually in 2033, according to the Congressional Budget Office (CBO).”
The latest projections from the CBO show that the cost of servicing the national debt in the United States is expected to reach unprecedented levels in the next 10 years.
The CBO’s recent budget and economic outlook for the next decade indicate that the cost of servicing the national debt will more than double during that period. The government is projected to spend approximately $10.5 trillion on interest expenses alone over the coming decade.
In Fiscal Year 2022, American taxpayers spent $475 billion on interest expenses for the national debt.
This amount is anticipated to rise to $640 billion in the current fiscal year (FY2023).
As the federal government continues to run budget deficits and the debt level increases in the coming years, interest spending is projected to exceed $1 trillion for the first time in Fiscal Year 2029, eventually reaching $1.4 trillion by 2033.
Does this sound sustainable to you? And do you think our government representatives have the courage to address this looming threat to our way of life?
I don’t know about you, but I wouldn’t bet on it.
But hey, here’s to hoping.