Wake-Up Call: U.S. Federal Debt on an Unsustainable Path!

Is it a bump in the road, or the end of an empire? From a financial perspective, trust in the U.S. is eroding as the sovereign debt crisis has reached  unmanageable levels.
 
It’s been going on for so long that no one can blame just one president or one generation of Americans. $36 trillion of federal debt didn’t happen overnight; it’s the culmination of decades of kicking the can down the road.

To appreciate how long this has been going on, consider that Standard and Poors downgraded the U.S. government’s credit rating in 2011, and then Fitch did the same thing in 2023. Now, Moody’s is doing it, too.

In fact, Moody’s is downgrading the U.S. sovereign credit rating for the first time ever from a pristine “AAA” to “AA1.” With that, all three of the major American credit agencies have downgraded the nation’s credit rating.

It’s not difficult to see why this is happening. As Moody’s points out, the U.S. debt-to-GDP ratio is on track to reach 134% by 2035. Deficit spending as a percentage of GDP is now at World War II levels, and federal interest payments are expected to total approximately 30% of the country’s revenue by 2035.

Courtesy: Holger Zschaepitz

 
In other words, it’s not only the debt burden, but the interest burden that’s become unsustainable. Again, Moody’s doesn’t blame just one president or one politician; the agency explains, “Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”

Bear in mind, Moody’s had maintained a perfect “AAA” rating on American federal debt since 1919. For anyone who needs it, this downgrade is definitely a wake-up call that the other shoe is about to drop; as always, the middle class will have to deal with the fallout.

Amid these bright-red warning signs, the Federal Reserve remains in “wait and see” mode as Fed Chairman Jerome Powell prefers to await more data instead of taking swift action. This begs the question of how much more data Powell needs before he’s willing to lower interest rates and thereby reduce the nation’s massive interest burden.

How many more people have to lose their jobs before the Fed takes action? Even the Federal Reserve itself is dealing with job losses as the Powell just announced that the Fed plans to fire 10% of its workforce (though Powell gets to finish his term, of course).

Courtesy: Kevin Gordon

Powell is also getting signals from the bond market, which sometimes sees signs of trouble before the stock market does. In a decidedly risk-off move, government bond yields shot up and bond prices tumbled when Moody’s published its U.S. credit rating downgrade.

An easing of interest rates would not only make it easier for the government to service its debt, but it could also bring relief to many struggling Americans. Houses remain unsold for months as mortgage rates are elevated, and household debt currently sits at a record $18.2 trillion.

Truly, it’s a debtor nation at multiple levels. Total U.S. credit card balances have surpassed$1 trillion; auto loan delinquencies have reached their highest levels in decades; and one in four student loan borrowers is already struggling to make their payments.

The latest University of Michigan’s recent survey showed that consumer sentiment just fell to its second-lowest reading on record. Thus, the people can sense what’s happening even if some central bankers refuse to acknowledge it. It’s a good thing that there are ways to protect your wealth and your freedom — and they don’t involve government debt notes, counterparty risk, or trust in the powers that be.