The United States passed a momentous barrier this week. Quietly, and without much fanfare, the total amount that the world's erstwhile superpower owes to its creditors passed $40tn. That is, forty thousand billion dollars. The debt continues to accelerate at a historic rate, having grown by almost $8bn per day over the past year.
Servicing interest on its loans is now one of the biggest line items in the American budget, behind only Social Security and Medicare. About one dollar in every five collected in federal revenues goes towards the interest bill, itself approaching $1tn annually. Interest payments now far exceed the eye-watering sums that the US government spends on its over-stretched military. And, with demographic changes heralding a Social Security and pensions crisis, the problem is only going to get worse.
Trump's Debt Promise Ignored
The US president, of course, appears to have forgotten all about his campaign promises to address the debt and accomplish the now-impossible task of balancing the budget. Indeed, one might wryly observe that for Republicans, the national debt is a problem to be highlighted and campaigned on only when Democrats are in power. Democrats, by contrast, are admirably consistent, expressing little concern about the matter whether in office or in opposition.
Look at the numbers in the round. Social Security payments to America's retirees will amount to about $1.77tn in 2026, and that figure is set to rise by more than 50% over the next decade, adding almost $1tn in annual expenditure. By now, nothing can be done to change that. Even if every American woman of child-bearing age had eight or nine children over the next 10 years, those children would still be too young to pay the taxes needed to ease the pensions crisis. The explosion in Social Security spending is a mathematical certainty, short of some politician willing to incinerate his career by cutting benefits or raising the retirement age.
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Defense spending, too, is slated to rise. Even with its enormous budget, the Pentagon finds itself over-stretched and under-resourced, with sailors on the USS Abraham Lincoln reportedly close to mutiny after spending more than nine months at sea. US missile and armament stocks are low, and the Pentagon appears increasingly a military behemoth equipped to fight the last war rather than to wage war in a world of cyberattacks and cheap drones.
A Debt Crisis Built into the System
The figures leave no room for doubt: one way or another, the United States is on course for a historic debt crisis, of a kind previously confined to failed states like Argentina.
One reason for this, perhaps the largest, is democracy itself. The US runs on an unusually short electoral cycle, with representatives elected every two years and presidents serving four-year terms. No president has won two consecutive terms in almost a decade. For the current incumbent, the debt crisis will not hit until after he has left office, at which point he will, as ever, blame his successor.
Yet it is the Trump era that should be remembered as the moment America lost touch with fiscal and mathematical reality. In his first term, President Trump added almost as much debt as President Obama managed across two. Between them, Obama and Bush added more to the national debt than every president before them combined had accumulated by the turn of the millennium. Since then, America's credit-card bill has grown from modest and manageable into the kind of red-ink letter that gets thrown in the bin unopened, in the hope that the problem will simply disappear.
Why America's Debt Is Everyone's Problem
The US debt crisis is a problem that the rest of the world, similarly, refuses to confront. The dollar remains the world's reserve currency, and faith in Uncle Sam's ability to repay his bills has underpinned global commerce for almost 100 years. America's debts are held not only by Americans but by pension funds and sovereign wealth funds across the globe. Should the realization dawn, as it will at some point in the next 20 years, that America may not be able to pay, the resulting economic crisis could make the Great Depression look like a child's birthday party.
As is often the case with a problem this large, many Americans, and even some otherwise intelligent observers, simply refuse to face it. Economic fantasies are the order of the day instead: that the US Federal Reserve, for example, can simply keep printing money to cover the bill, which would have the side effect of destroying the value of the dollar. Or, for more radical right-wingers, that a US sovereign debt crisis might be something to be welcomed, allowing Uncle Sam to default and using the pain to restore fiscal sanity.
That, too, is madness. Treating a US debt crisis as a cure for the world's ills is not far removed from prescribing cyanide for a head cold.
An American Problem, a European Solution
The sad truth is that Americans, and plenty of Europeans, refuse to recognize the unpalatable truth: the US owes this money and must repay it. Doing so will mean slashing public spending and raising taxes significantly. It is not as though Washington lacks options.
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Oddly enough, the US has no value added tax (VAT). Unpalatable as introducing one might be, a broad, European-style 21% VAT could plausibly raise well over $2tn a year, depending on how it is designed, bringing the budget much closer to balance while delivering a short, sharp inflationary shock.
The EU offers a cautionary tale here. Rather than using new tax revenue to pay down debt, politicians tend to find fresh ways to spend it. If the US ever does introduce a VAT, it should do so only on the condition that the revenue is legally ring-fenced for debt reduction and nothing else. That, at least, might make the idea more politically palatable.
Republicans and right-wingers are instinctively hostile to tax increases. But this is a mess their own profligacy created, and it must be fixed, or the price will be paid by billions of people worldwide who had no hand in causing it.
