The debt bomb is now ticking faster...

As we start this post, the US national debt is $22,539,726,000,000 growing by about $1,000,000 a minute.  Earlier this summer, Congress and the White House agreed on a budget deal that ensures this will only grow faster.

Following the budget deal, the Congressional Budget Office put out a revised deficit estimate and the projection is for increased budget deficits as far as the eye can see:

Note that more than half of future deficits will be used just to pay the interest on the national debt.  

 Valery Ramey, writing in the Wall Street Journal, summarizes the likely trajectory for the national debt in an era of sustained deficits.  We are on track to grow the national debt to levels not seen since World War II. 

Unless drastic action is taken soon, we may grow the national debt to more than 100% of GDP, joining China and Japan in the danger zone.  Unfortunately, unlike China or Japan, much of our debt is held by foreigners.  We've enjoyed this privilege because the American dollar is the world's reserve currency. 

Central bankers however have begun to be alarmed about this.  Having the  dollar as the world's reserve currency was fine after WWII when the US had by far the world's largest economy.  That's changed however and China is on track to become the world's largest economy in the next decade.  Inevitably, the world will have to move away from the dollar and when that happens, we will have to pay market rates - interest rates - for money.   Imagine the effect on our budget and economy when interest rates on Treasury bills have to be say 2% higher to get them sold.  We are currently spending 1.8% of GDP on debt servicing; this is projected to rise to 2.6% of GDP by 2029 with no change in reserve currency status.  If countries start moving away from the dollar - and not buying our debt - interest rates will rise by more than projected and we will be borrowing and taxing increasing amounts of money just to pay the interest on the national debt.  Zerohedge summarizes the history of reserve currency transitions through history; you can make the argument that our time might be up.

Is there any indication this is happening?  Last week at Jackson Hole, central bankers got together for their annual meeting and outgoing Bank of England governor Mark Carney made the case for a new transnational reserve crypto-currency.   Over the past decade, other countries have been returning to an older transnational reserve currency - gold.

Democrats and now Republicans have convinced themselves that the national debt just doesn't matter - no matter the size.   We can just grow our way out of it with nary a care.  With interest rates near zero world-wide, we might get away with this a bit longer.  If we lose reserve currency status or interest rates revert to more normal levels of around 4%, we're going to discover that we are no longer masters in our own house.   Some very hard choices will have to be made.

The only national political party to make a central issue of controlling the deficit and debt is The Alliance Party.  Let's hope people listen to us before it is too late.

-- Mike Power