Guancha: The total US federal government debt has exceeded 30 trillion, which has greatly exceeded the US GDP of about 23 trillion US dollars last year. We will see the interest payments on the national debt gradually rise. Is it possible for the federal government to reverse the continuing rise in debt? If not, will this trigger even stronger debt default crisis even global financial risks?
Dr. Gal Luft: In order to shrink the such a huge debt one of two things must happen: either the government increases its revenues through robust economic growth and increased taxation or the it reduces its expenditures, for example by cutting the defense budget. Ideally it would be some combination of the two. However, it does not look like the Biden administration has the power or will to do either of those. Ahead of the midterm elections and with rising inflation, raising taxes is a political suicide. Biden is talking about taxing the rich, but it would be an uphill battle with risk of capital flight from the US to various tax havens. After pouring trillions of dollars into the economy in various Covid recovery programs and after keeping interest rates at near zero for nearly a decade and a half, the Fed is running out of tools to stimulate the economy. As for reducing government expenditures this is equally unlikely. In fact, with 10,000 baby boomers retiring daily the expenditures only seem to grow. Biden’s defense budget for 2023 reflects an increase of $79 billion which is bigger than the entire military spending of Russia. With the political class unwilling to take any painful step in the direction of cutting the deficit, the debt will continue to balloon, and with rising interest rates the cost of servicing the debt could become by the end of the decade the number one expenditure of the US government – bigger than the defense budget. Countries buying US bonds watch this spectacle with horror and asking themselves “where does it all lead to?” Can the US ever pay back such debt or is it the mother of all debt-traps? I think this will shape central banks’ decisions on how much US debt to continue to hold.