Over the past 200 years, Greece has reneged seven times on the repayment of its national debt. And in 2017, Greece once again teetered on default but, by agreeing to austerity measures, was bailed out by the European Central Bank (ECB) and the International Monetary Fund (IMF). In most cases, Greek government spending beyond its means - i.e. deficit spending - produced these nasty outcomes. Will the U.S. government face the same problem in the years ahead?
With the U.S. debt, both public and private, now exceeding $20 trillion, or 104% of Gross Domestic Product (GDP), lenders and taxpayers are questioning the federal government's ability to pay interest and principal on that debt. The debt as a percent of GDP has exploded from 39.6% in 1966 to 103.7% in 2017 producing this concern. During this time period, U.S. presidents ranged in their contribution to the problem. As a percent of GDP, during Obama's term, the debt increased by 4.7 percentage points per year. At the other end of the spectrum, the ratio declined by 1.1 percentage points annually under Johnson. Others include: Bush Sr. a yearly gain of 3.1 points; Reagan an increase of 2.2 points annually; Bush Jr. an upturn of 1.5 points per year; Ford an expansion of 0.4 points yearly; Carter a reduction of 0.5 points per year; Nixon a decrease of 0.6 points yearly; and Clinton an annual drop of 0.8 points.
Adding to the potential crisis, the CBO projects that debt held by the public will advance by another 12% in the next decade. U.S. taxpayers and investors ask, is the U.S. the next Greece? The quick, short and accurate answer is NO! But why not?
First, the U.S. dollar is, and will continue to be, the global reserve currency. This means that foreign investors remain willing to lend to the U.S. despite the heavy debt load and current rock bottom interest rates.
Second, the U.S. Federal Reserve stands ready to buy U.S. debt regardless of the size of the debt. This Fed action would boost the money supply, increase inflationary pressures, and reduce the size of the inflation-adjusted debt.
Third, the U.S. Treasury can always open the dollar spigot to pay interest and return principal on maturing notes, again adding to inflationary pressures and diminishing the size of the inflation-adjusted debt load.
Finally, the federal government can raise federal taxes to cover government over-spending.
The outcomes from these actions for a younger generation are likely to be a combination of higher interest rates, greater inflation and expanding taxes.
That is, baby boomers stick it to Millennials!