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Inside Sources: A U.S. Debt Crisis: From Denial to Reality

October 29, 2020
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Article by Sven R. Larson in Inside Sources

On September 21st, the Congressional Budget Office released a long-term outlook on government debt. In a dire warning the CBO projects that in 2050 the debt will equal 195 percent of GDP.

A debt explosion of this magnitude should rightfully send shivers through the country. This is a mounting national crisis that transcends party lines and ideological affiliations. Both parties in Congress have gone AWOL on this issue, and both Donald Trump and Joe Biden carefully ignore the problem.

This political inaction is, frankly, inexcusable. By remaining deadlocked in partisanship, Congress is rapidly running out of time to proactively address the crisis. This will have devastating consequences for generations to come.

There is emerging data from the Bureau of Economic Analysis (BEA) that shows that our elected officials drastically over-sized their stimulus spending.

In the second quarter of this year, America’s households received $254 in unemployment benefits for every $100 they lost in work-based income.

Then there were the stimulus checks, which the Treasury began sending out in May. If we add them to the unemployment benefits, Americans got $566 from the government for every $100 we lost in income.

Again, it is perfectly reasonable that government compensates for income losses it inflicts on people by forcing their workplaces to close. What is not reasonable is this drastic over-sizing of the compensation — especially at a time when the government is already borrowing up to a quarter of every dollar it spends.

To make matters worse, looking again at BEA data, states and local governments have received $200 billion in stimulus money that they did not need.

Irresponsible over-spending during the economic shutdown has significantly exacerbated the debt problems that the CBO points to. Congress needs to immediately set aside all partisanship and develop a master plan to save our nation from a debt crisis.

That crisis sets in when investors lose faith in the government’s ability to make debt payments. Creditors demand higher interest rates and shorter debt maturities. Interest rates rise — and rise fast. The now classic example is Greece: when the debt crisis became acute in 2010 interest rates rose to 25 percent.

During the Swedish debt crisis in the early 1990s interest rates topped out at an unbelievable 500 percent. The economy ground to a complete halt, the currency crashed and parliament rushed to execute an austerity plan that raised net taxation on the economy by seven percent of GDP.

Which brings us to the next phase of a debt crisis.

If the U.S. crisis would be followed by austerity at the Swedish level, Congress would raise taxes and cut spending by an equivalent of almost $1.5 trillion. If they followed in the Greek footsteps, things would ....

To read this article in Inside Sources in its entirety, click here.

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