In a previous blog, we looked at the US Debt and how the money was raised and spent each year by the US Government.
https://www.shartruwealth.com.au/insights/blogs/us-government-debt-overview/
US Federal debt is now at USD $36 Trillion.
With Gross Domestic Product (total revenue in the US economy) of USD $29 Trillion this leaves debt to GDP at 124%.
According to many views including Reinhardt and Rogoff who produced papers in 2010 and 2012 a level of debt to GDP above 90% sees a dramatic worsening in growth outcomes for economies.
With interest rates increasing in the last couple of years, the cost of servicing this debt increasing to over USD $1.1 Trillion each year.
Luke Gromen from Forest For the Trees pointed out in his research report “Ferguson Law”. Economist Nial Ferguson stated, “any great power that spends more in interest payments on its debt than on defense will not be great for long”.
“We simply cannot sustain $2T deficits; our interest on the debt now exceed defense spending. If we don’t do this, America will go bankrupt.” -Elon Musk
Note as the United States has a printing press, it will not actually go bankrupt as it will simply print more money. The impact will be that the value of those USD (what they can buy) will be less.
So, who owns this debt?
Over the last 10 years, foreign central banks have not been adding to USD bonds to their reserves. This is important as these buyers are not “price sensitive” due to the fact that they need to hold a percentage of their reserves in USD as it is the reserve currency and is required for trade and debt settlement.
According to the Federal Reserve and U.S. Department of the Treasury, foreign countries held a total of 8.5 trillion U.S. dollars in U.S. treasury securities as of December 2024 (approximately 23%).
If the US continues to run a deficit, then this will increase the amount of debt.
This debt is more and more being bought by price-sensitive buyers who need a financial return and don’t simply need to store them for later, like Central banks. If interest rates go higher, this will make those buyers more reluctant to buy the debt (at current prices). Furthermore, if others are being forced to sell like foreign countries who, because of the strength of the USD, need to find more USD to pay their USD liabilities, this will provide another reason for selling US bonds. For example, currently, Japan who is the largest holder of US debt at more than USD $1 Trillion has a falling yen exchange rate (they need more Yen to get the same level of USD) and increasing domestic interest rates, which makes the repatriation of USD to Yen more compelling.
In the next blog, we will look at the breakdown of the US Government spending and whether DOGE (run by Elon Musk) and other initiatives will move the needle on reducing the deficit. To stop the debt from rising, the deficit needs to become breakeven or a surplus (reduce the debt).
Article by: Rob Coyte, CEO, Shartru Wealth Management