The Debt—Does Anyone Care?
The worst part about the U.S. federal debt is not how big it has become but the fact that its growth has now become so unstoppable that we now assume that piling debt on future generations is the natural thing for the authorities to do. The Congressional Budget Office estimates that by 2051 the federal debt will equal more than 200 percent of gross domestic product, an outcome that will result from cumulative fiscal deficits of $112 trillion over the next thirty years. The debt projection leaves aside debt owed to the government by itself, such as the trillions owed to the social security trust fund.
A major lender to the U.S. government is...the U.S. government, i.e. the Fed. In 2011 the Federal Reserve held $1.7 trillion in government bonds, about one-sixth of the total debt, while today it holds $5.1 trillion, almost a quarter of the total. To put things in perspective, ten years ago the sum of what China and Japan held was 21 percent of the U.S. federal debt, while today their combined share is half of that. There is still one lender that holds a larger proportion of U.S. debt than the Fed—non-governmental domestic lenders. But the Fed has increased its share by 200 percent, while the other domestic lenders have increased theirs by 160 percent.
What this means is that we can expect foreign lenders, who already hold much less U.S. debt than people think, to become a smaller creditor of the U.S. in the future and the Fed to continue to increase its share dramatically. Could we not say the same thing about non-governmental lenders? After all, they have increased their share from 36 to 45 percent of the total. I don’t think so. Unless they are forced to do so by diktat, something that governments do in times of emergency, they will become increasingly wary of the danger of continuing to amass federal bonds. We can expect the bulk of the new lending to come from the Fed, which doesn´t seem to care about the consequences.
This dynamic—monetizing abundant government debt—has been at work for many years now. Much of what we are seeing in the stock market and in the real estate market (where prices are now higher than at the top of the housing bubble in 2006) has to do with interest rate suppression and artificial valuations brought about by it. The various asset-purchase programs have had an impact on interest rates and they, in turn, have influenced (I mean distorted) the larger financial scene, as interest rates, a major economic signal, normally do.
If the U.S. government needs another $112 trillion in the next three decades to cover its fiscal deficits, the options are very few. Since the U.S. finances are already seen as highly fragile by the international community, it is extremely unlikely that foreign lenders will come to the rescue. That leaves the Fed, i.e. money printing, as the only realistic alternative—and perhaps forcing non-governmental lenders to buy part of that debt too.
What a colossal mess.