The Global Threat of National Debt: Current Situation and Potential Consequences

In recent years, concerns about national debt in developed countries, especially in the United States, have sharply increased. Economists and analysts have long been warning of an impending crisis, and the US has missed all opportunities to avoid it. Now, we can only imagine what this crisis will look like and how much damage it will inflict on the global economy.

The History of the Debt Supercycle

The theory of the debt supercycle, developed in the 1970s, describes the sharp increase in private sector debt in the US after World War II. These years are often seen as a golden age, but this period also laid the foundation for the current problem.

Comparing economic life since 1875, it is clear that the first half of the period was much more unstable than the second half. After World War II, the US economy experienced more stable times, despite the severe crisis of 2007-2009, which, while the worst since the Great Depression of the 1930s, did not seem as devastating compared to some downturns of the late 19th and early 20th centuries.

The Role of Government in the Economy

Before the Great Depression, the economy was more free-market oriented, with minimal government intervention. Economic booms and busts were harsh but acted as natural market cleansers. However, after the Great Depression, the government decided to intervene to smooth out business cycles. This led to the creation of deposit insurance systems and unemployment benefits, as well as increased government spending on infrastructure projects.

While this led to more stable growth and fewer economic collapses, the accumulation of debt became a problem. Excesses that would normally be washed out during downturns began to accumulate, leading to each new upswing starting with increased debt and imbalances. Additionally, governments did not follow Keynesian recommendations to maintain budget surpluses in good times to fund deficits during bad times, resulting in chronic national deficits.

The Role of Modern Central Banks

Modern central banks, such as the Federal Reserve (Fed), were created to mitigate economic fluctuations. They have succeeded in this, but the stability came at a cost. Attempts to smooth cycles have led to the accumulation of enormous debt, which now threatens economic stability.

The Shift in Debt Burden

The Great Financial Crisis of 2007-2009 marked a significant shift in the debt burden. Consumers, who had taken on massive amounts of mortgage debt, faced a brutal collapse in housing prices, leading to a surge in loan delinquencies and foreclosures. The Fed responded by lowering interest rates and injecting liquidity into the financial system. However, consumers became more cautious and were reluctant to take on new debt, effectively ending the debt supercycle in its previous form.

The Rise of National Debt

The situation changed when debt began shifting from the private sector to the public sector. Government programs like Fannie Mae and Freddie Mac took on a large portion of mortgage debt, and various COVID-19 relief programs further increased national debt. Now, private loans are being transferred to taxpayers, dramatically increasing the national debt burden.

Risks and Forecasts

US national debt is fundamentally different from private debt. The government has unique powers, such as the ability to raise taxes, compel financial institutions to buy bonds, and use central banks to absorb debt. However, the limit is reached when investors are no longer willing to buy bonds at yields the economy can sustain, or when debt servicing costs crowd out other essential expenditures.

While the US has not yet reached this point, forecasts indicate that by 2050, interest expenses could consume a third of federal revenues. In the event of a crisis, such as investors refusing to buy bonds, the Fed might resort to quantitative easing, but this is only a temporary measure. Ultimately, inflation and loss of investor confidence could lead to severe consequences.

The Inevitability of Crisis

There is very little chance that the next US administration will restore fiscal discipline. Without a crisis, the problem of national debt and deficit will not be solved. A crisis could lead to rising interest rates, causing massive upheavals and possibly even civil unrest.

Conclusion

The issue of US national debt remains one of the most pressing in the modern economy. The stability achieved through debt accumulation comes at a cost, and without significant changes in fiscal policy, a crisis seems inevitable. The global community should closely monitor developments to be prepared for the potential consequences of this debt crisis.

BT