Why 2028 Could Be the Year the US Debt Crisis Finally Hits the Fan | James R. Harrigan, Antony Davies (2022)

Now that the presidential campaign season is in the rear-view mirror, it’s clearly time to get back to normal. Unfortunately, normality isn’t any more linked to the truth than is the election cycle, even if the lies are a lot harder to spot. But as is always the case in politics, all you need to do is follow the money, or the promise thereof.

And when politicians talk about money, they are almost always talking about figures and forecasts made by the Congressional Budget Office, a nonpartisan organization charged with providing budgetary analyses to Congress.

Periodically, the CBO produces ten year forecasts of federal spending, revenues, and debt. These projections, called “baseline projections,” are the CBO’s best guess as to what spending, revenue, and debt will look like in the future, assuming no change in governmental policies. While it is unrealistic to assume that policies will remain fixed, the baseline projections provide a means of comparing proposed changes in specific policies by holding everything else constant.

The CBO consistently over-estimates revenues. Of the 198 revenue projections it has made, more than 80 percent were too high.

While the CBO’s baseline projections aren’t meant to be used as forecasts of the future, with some adjustments, they are consistent enough to provide some insights into the future. The CBO’s latest budget outlook has the federal government running budget deficits of over $1 trillion per year for each of the next ten years. That would leave us with a gross federal debt just shy of $38 trillion by 2030.

But how accurate are these projections?

A comparison of past CBO baseline projections to what actually transpired reveals a pattern, and to anyone who keeps an eye on the government it is not a surprising pattern. The CBO’s baseline projections under-estimate future federal spending, and over-estimate future federal revenues.

Quelle surprise.

The federal government has been borrowing increasing amounts of money for decades without consequence.

From 1997 to the present, the CBO has made 198 revenue projections that we can compare to what actually happened. When projecting one year into the future, CBO’s revenue projections are too high by an average of five percent. When projecting five years into the future, their revenue projections are too high by an average of 17 percent, and when projecting ten years into the future, their projections are too high by an average of 26 percent.

These rosy projections aren’t due to a handful of projections being markedly off on the high side. The CBO consistently over-estimates revenues. Of the 198 revenue projections it has made, more than 80 percent were too high. If the CBO’s projections were unbiased, we’d expect about half to be too high and half to be too low. That 80 percent are too high indicates a flaw in the projections themselves.

Granted, these are baseline projections that assume no future policy changes. However, when policy changes make revenue projections too rosy 80 percent of the time, to assume no policy changes is to assume a significant change in policy.

While the CBO’s revenue projections are consistently too high, their spending projections are, predictably, consistently too low. Of the 198 spending projections that have come to pass, 60 percent were too low. When forecasting one year out, CBO under-predicts spending by around one percent. When forecasting five years out, CBO under-predicts spending by four percent, and when projecting 10 years out, almost 10 percent.

Why 2028 Could Be the Year the US Debt Crisis Finally Hits the Fan | James R. Harrigan, Antony Davies (1)

Consistently over-predicting receipts while under-predicting expenditures results in all manner of trouble, especially when the numbers in question are produced at the behest of Congress, which has never been particularly budget conscious. And the differences between the CBO’s predictions and reality are a lot more problematic than they first appear to be, manifesting in ever more federal debt with each predictive misfire.

Of the CBO’s 198 projections since 1997, almost 80 percent have under-predicted future debt. And the size of the error is quite large. When forecasting five years into the future, the CBO’s projection for the debt is, on average, about 25 percent too low. When forecasting ten years into the future, the CBO’s projection tends to be around 55 percent too low. In other words, the actual federal debt ten years into the future tends to be more than double what CBO projects.

As of September 2020, the CBO projects that the federal debt will be almost $38 trillion by 2030. If this forecast is off by the same amount as the CBO’s average ten-year forecast, we can expect the debt by 2030 to be north of $50 trillion. While that may sound unbelievable, consider that in 2010 the CBO projected the federal debt would be less than $21 trillion by 2020. Today, at over $27 trillion, the debt is around 30 percent larger than predicted. Of course, around three trillion of that was due to the COVID lockdown. But absent COVID, the CBO’s projection for 2020 would have still been around 12 percent too low.

But does it even matter if the CBO’s debt projections are off? The federal government has been borrowing increasing amounts of money for decades without consequence. That the CBO has underestimated the magnitude of the borrowing doesn’t change the fact that the borrowing—enormous though it is—hasn’t caused any real problems. At least so far.

But we cannot run the debt up forever without severe repercussions.

The evidence points to the fact that the Federal Reserve is financing a growing share of the federal debt by printing money.

There is a point at which the federal debt will have to be monetized, largely because lenders eventually lose their taste for lending. All the money the federal government borrows comes from four sources: foreign lenders, private domestic lenders, the Federal Reserve, and intragovernmental debt (mostly, money borrowed from the Social Security trust fund and government employee pension funds). Over the past decade and as a fraction of total federal debt, money borrowed from intragovernmental sources has declined more than 40 percent, money borrowed from foreign sources has declined 15 percent, money borrowed from private domestic sources has risen 35 percent, and money borrowed from the Federal Reserve has increased more than 200 percent.

The Social Security trust fund has run out of money to loan the government. Foreign investors are lending the US government more than they did a decade ago, but the growth in their lending has been slower than the growth in federal borrowing. When it comes to lending ever more money to the federal government, the Federal Reserve and private domestic lenders are doing the heavy lifting. Not coincidentally, over the past decade, the velocity of money has declined more than 50 percent. This indicates that new money the Federal Reserve has pumped into the economy has been going largely into savings—and one of the places private domestic savers park their savings is in Treasury bills. The evidence points to the fact that the Federal Reserve is financing a growing share of the federal debt by printing money. As the federal debt continues to grow, the Federal Reserve will come to play an ever greater role as the lender of last resort.

So we already have monetization. How long can it go on?

If the CBO’s current forecasts are as off as have been their historical forecasts, sometime in 2028 the federal debt will reach a level that, when last seen, caused the government to issue a new currency.

We have one example in our history. In the late 1700s, the federal government assumed the war debt that the former Colonies had incurred in the Revolution. Upon taking on the debt, the government then issued a new currency—the US dollar. Citizens who held the old Continental dollars could exchange them for the new US dollar for around one percent of their face value. The new dollar served a dual purpose: It unified the control of the young country’s currency under the federal government, and it removed from circulation the Continental dollars whose values had been massively eroded as the states printed money to fund the war effort.

At the time, the government’s debt totaled 15 times annual federal revenues. For perspective, federal debt reached a high of around 6 times annual federal revenues during the Civil War and again World War II. Today, at $27 trillion, the federal debt is almost 8 times annual federal revenues—higher than it was during our greatest wars, yet still just over half of what it was in the late 1700s. And, if CBO forecasts are to be believed, the debt-to-revenue ratio will rise to 8.5 in 2021, then fall steadily to just below 7 by 2030.

If CBO forecasts are to be believed.

If we adjust CBO forecasts for their historical biases, we get a very different picture. The adjusted CBO numbers show the debt-to-revenue ratio passing the 15 mark sometime in 2028. If the CBO’s current forecasts are as off as have been their historical forecasts, sometime in 2028 the federal debt will reach a level that, when last seen, caused the government to issue a new currency.

So following the money turns out to be an unhappy affair. Our politicians, aided and abetted by the Congressional Budget Office, have managed to maintain a business-as-usual economy even as they have started monetizing the massive US debt. There is only more of this in the future, and when more of this comes it will just be a matter time before crippling inflation comes too.

@AntonyDavies is Associate Professor of economics at Duquesne University, and the Milton Friedman Distinguished Fellow at the Foundation for Economic Education.

@JamesRHarrigan is Managing Director of the Center for the Philosophy of Freedom at the University of Arizona, and the F.A. Hayek Distinguished Fellow at the Foundation for Economic Education.

Together, they host the weekly podcast Words & Numbers.

FAQs

Why does the US issue so much debt? ›

Tax Cuts. Large tax cuts passed by Congress during the presidencies of George W. Bush and Donald Trump have played a large part in the subsequent deterioration of government finances and the resulting growth in the national debt.

Is the US headed for a debt crisis? ›

The world's major economies including the United States are heading towards a "stagflationary debt crisis", which may lead to the equity market crashing by around 50 percent, warned economist Nouriel Roubini, who is known as 'Dr Doom' for his forecast of the 2008 global recession.

Why the US national debt has been increasing for decades? ›

The national debt level of the United States is a measurement of how much the government owes its creditors. Since the government almost always spends more than it takes in via taxes and other income, the national debt continues to rise.

What president got rid of debt? ›

However, President Andrew Jackson shrank that debt to zero in 1835. It was the only time in U.S. history when the country was free of debt.

Why is US debt increasing? ›

The U.S. national debt is so big because Congress continues both deficit spending and tax cuts. If steps are not taken, the ability for the U.S. to pay back its debt will come into question, affecting the global economy.

Who owns the most US debt? ›

At the end of July 2021, 53% of federal debt was owned by investors from the United States, including the Federal Reserve. The various trust funds operated by the United States government, like the Social Security and Medicare trust fund accounts, held another 22% of federal debt.

Is the US in a debt trap? ›

But there is one country that has led several nations into a suffocating debt trap, and that is the United States. According to the World Bank's Global Waves of Debt report in 2019, developing countries and emerging economies have experienced four waves of debt accumulation over the past 50 years.

Can the US pay off its debt? ›

Can the U.S. Pay Off its Debt? As budget deficits are one of the factors that contribute to the national debt, the U.S. can take measures to pay off its debt through budget surpluses. The last time that the U.S. held a budget surplus was in 2001.

How can we solve the debt crisis? ›

Solving the low-income country debt crisis: four solutions
  1. Boost alternatives to borrowing. ...
  2. Manage borrowing and lending better. ...
  3. Increase accountability to improve the behaviour of borrowers and lenders. ...
  4. Introduce better ways of managing shocks and crises.

Which country has no debt? ›

The 20 countries with the lowest national debt in 2021 in relation to gross domestic product (GDP)
CharacteristicNational debt in relation to GDP
Macao SAR0%
Brunei Darussalam1.77%
Hong Kong SAR2.17%
Tuvalu6.02%
9 more rows

What will happen if the national debt continues to rise? ›

The higher the national debt becomes, the more the U.S. is seen as a global credit risk. This could impact the U.S.'s ability to borrow money in times of increased global pressure and put us at risk for not being able to meet our obligations to our allies—especially in wartime.

Who owns US debt by country? ›

Foreign holders of United States treasury debt

Of the total 7.42 trillion held by foreign countries, Japan and Mainland China held the greatest portions. China held 980.8 billion U.S. dollars in U.S. securities. Japan held 1.21 trillion U.S. dollars worth.

Has the US ever had no debt? ›

As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.

What country has the most debt? ›

Japan, with its population of 127,185,332, has the highest national debt in the world at 234.18% of its GDP, followed by Greece at 181.78%. Japan's national debt currently sits at ¥1,028 trillion ($9.087 trillion USD).

Who does the US owe money to? ›

The public holds over $22 trillion of the national debt. 3 Foreign governments hold a large portion of the public debt, while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, pensions funds, insurance companies, and holders of savings bonds.

Who is the world in debt to? ›

What is global debt? Global debt is borrowing by governments, businesses and people, and it's at dangerously high levels. In 2021, global debt reached a record $303 trillion, according to the Institute of International Finance, a global financial industry association.

Is debt good for a country? ›

Debt, per se, is not bad. Unlike individuals, a government does not need to save funds for its old age and hence, worry about holding debt. When a nation borrows with prudence and uses the funds to build efficient infrastructure, it improves its capacity to grow at a faster rate.

What percentage of America is debt free? ›

And yet, over half of Americans surveyed (53%) say that debt reduction is a top priority—while nearly a quarter (23%) say they have no debt. And that percentage may rise.

Does China owe the U.S. money? ›

China has steadily accumulated U.S. Treasury securities over the last few decades. As of October 2021, the Asian nation owns $1.065 trillion, or about 3.68%, of the $28.9 trillion U.S. national debt, which is more than any other foreign country except Japan.

What country owes U.S. the most money? ›

  1. Japan. Japan held $1.3 trillion in Treasury securities as of May 2022, beating out China as the largest foreign holder of U.S. debt. ...
  2. China. China gets a lot of attention for holding a big chunk of the U.S. government's debt. ...
  3. The United Kingdom. ...
  4. Ireland. ...
  5. Luxembourg.

Who has more debt U.S. or China? ›

China's debt is more than 250 percent of GDP, higher than the United States.

Which country owes China the most money? ›

Which Country Owes the Most Money to China? Venezuela is the country with the greatest sovereign debt exposure to China, in terms of direct lending (excluding portfolio holdings), according to AidData's 2021 study, totaling $74.7 billion.

How many zombie companies are there in the US? ›

The corporate undead

Zombies are ubiquitous in the US economy: They comprise 16% of US firms according to one Morgan Stanley calculation. Bloomberg reports that approximately one-fifth of America's largest 3,000 public companies are zombies, with debts totaling $900 billion (€853 billion).

How much does the world owe China? ›

Of the $35 billion that the world's 74 lowest-income nations will owe in debt service payments this year, about 37% — or $13.1 billion — is owed to Chinese entities, according to the World Bank. A similar amount, $13.4 billion, is owed to the private sector.

What happens if a country has no debt? ›

When a company fails to repay its debt, creditors file bankruptcy in the court of that country. The court then presides over the matter, and usually, the assets of the company are liquidated to pay off the creditors. However, when a country defaults, the lenders do not have any international court to go to.

What would happen if everyone paid off their debt? ›

What would really happen? The economy would slump. Consumer spending is roughly 70 percent of GDP.. Since, according to the Federal Reserve Bank of St. Louis, the savings rate is currently 3.7 percent, increasing the savings rate—a corollary to paying off debt—would mean a decrease in spending by 26.3 percent.

Does China have debt? ›

China's debt increased by $2.5 trillion over the first quarter and the United States added $1.5 trillion, the data showed, while total debt in the euro zone declined for a third consecutive quarter.

How long will it take for the US to get out of debt? ›

For those of you who like to shop…you'd have to spend $5 million a day for the next 546 years. And if you laid a trillion one-dollar bills end-to-end, they would wrap around the equator over 380 times and you'd still have 17 laps to go. Our $16 trillion debt could be paid off in a year.

How much does Japan owe the US? ›

As of 2022, the Japanese public debt is estimated to be approximately US$12.20 trillion US Dollars (1.4 quadrillion yen), or 266% of GDP, and is the highest of any developed nation. 45% of this debt is held by the Bank of Japan.

Does China own the US? ›

For its part, China owned 191,000 acres worth $1.9 billion as of 2019. This might not sound like a lot, but Chinese ownership of American farmland has exploded dramatically over the last decade. Indeed, there has been a tenfold expansion of Chinese ownership of farmland in the United States in less than a decade.

Why does the US owe China? ›

From a national perspective, China buys U.S. debt due to its complex financial system. The central bank must purchase U.S. Treasuries and other foreign assets to keep cash inflows from causing inflation.

What happens if the US goes into default? ›

It would greatly impact the economy and people in the U.S. A default would increase interest rates, which could then increase prices and contribute to inflation. The stock market would also suffer, as U.S. investments would not be seen as safe as they once were, especially if the U.S. credit rating was downgraded.

How much U.S. debt does Russia own? ›

The value of U.S. Treasury securities held by residents of Russia amounted to approximately two billion U.S. dollars in May 2022, remaining on nearly the same level as in the previous month.

How much U.S. debt does China own? ›

Continuing a trend that began early in 2021, China's portfolio of U.S. government debt in May dropped to $980.8 billion, according to Treasury Department data released Monday. That's a decline of nearly $23 billion from April and down nearly $100 billion, or 9%, from the year-earlier month.

Does China owe money to other countries? ›

At the end of 2020, China's foreign debt, including U.S. dollar debt, stood at roughly $2.4 trillion. Corporate debt is $27 trillion, while the country's total public debt exceeds 300 percent of GDP.

Could the US pay off its debt? ›

Congress has made many attempts to lower the national debt, but it hasn't been able to reduce the growth of what the nation owes. The U.S. debt is the outstanding obligation owed by the federal government.

Where does the US debt come from? ›

The public owes 74 percent of the current federal debt. Intragovernmental debt accounts for 26 percent or $5.9 trillion. The public includes foreign investors and foreign governments. These two groups account for 30 percent of the debt.

Who does the US owe money to? ›

The public holds over $22 trillion of the national debt. 3 Foreign governments hold a large portion of the public debt, while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, pensions funds, insurance companies, and holders of savings bonds.

What country is in the most debt? ›

Japan, with its population of 127,185,332, has the highest national debt in the world at 234.18% of its GDP, followed by Greece at 181.78%. Japan's national debt currently sits at ¥1,028 trillion ($9.087 trillion USD).

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