The concerns about the rising federal debt and the potential for a larger economic crash are well-founded. Here are a few key points to consider:
The Unsustainable Debt Burden
· The U.S. federal debt is indeed rising rapidly, with the government adding around $1 trillion every 90 days. This pace of debt accumulation is not sustainable in the long run.
· Government spending as a percentage of GDP is now at levels not seen since World War II, despite the absence of a major war or pandemic currently.
· This suggests the debt is being used to prop up economic growth, rather than being tied to a clear national emergency or crisis.
The Fragility of the Treasury Market
· U.S. Treasuries are treated as a safe, cash-equivalent asset by a wide range of financial institutions and investors.
· Any instability or loss of confidence in the Treasury market could have catastrophic ripple effects throughout the financial system.
· This is because Treasuries are so deeply embedded as a foundational asset class - a disruption could cascade through banks, pension funds, 401(k)s, and other critical parts of the economy.
The Risks of Unsustainable Growth
· The rapid growth being "bought" with debt may not be sustainable in the long run. As more and more financial experts suggests, the economy could be propped up by debt rather than genuine, productive growth.
· When this unsustainable debt-fueled growth model eventually breaks, the resulting crash could be much larger and more damaging than previous downturns.
In summary, the combination of rapidly rising debt, government spending at wartime levels, and the central role of Treasuries in the financial system means the risks of a severe economic crash are elevated. Policymakers would be wise to address the underlying debt and spending issues before they spiral out of control and trigger a major crisis. Prudent preparation and risk mitigation will be crucial going forward.
May 20, 2024
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