The Looming Threat of National Debt

The WealthCycles Staff

As the United States hurtles closer to the 100% debt to GDP mark—95.5% as of today—it becomes important to assess whether unsustainable national debt will be a chronic problem to plague the United States for generations to come. Even as Congress goes through the uniquely American tradition of grandstanding before consenting to raise the statutory debt limit, is there ever any real question that the debt limit will once again be raised?  

Once we cross the 100% mark, we will join Italy, Japan, Greece, and Ireland as some of the world’s most profligate governments—putting the prosperity of the future in jeopardy in the process.

At the heart of the debt problem is a philosophical problem—should the pain and problems of private entities be shared by society? We at are not really prepared to answer philosophical questions, but we can state the facts and point out opportunities and pitfalls. Any objective observer could point out that over the past few years the business cycle turned downward as real estate prices fell, triggering losses in the stock market, and spiking unemployment. But what started as a business cycle downturn has mutated into a sovereign debt and currency crisis that lies not too far in the future.

So whether the answer to the philosophical question is yes or no, the United States has unequivocally decided to spread the pain of the private business sector to all facets of our society, whether taxpayers like it or not.

Lenders have continued to lend to the United States because of the U.S.’s size, wealth, political stability (which internal observers might question), and a 200-year history of paying its bills (mostly) on time. The United States also controls the dollar—the world’s reserve currency and premier trading unit.

But those credit-worthy qualities are beginning to crumble, as lenders—foreign and domestic—begin to question the United States’ maniacal obsessions with spending and abusing the dollar. The national debt, $14 trillion and counting, is beginning to constrict the United States as the burden of payment comes closer and closer.  

The chart below shows that even though the U.S. doesn’t have the world’s highest debt levels (the blue bars) the average maturity of U.S. government bonds has sunk lower than that of any developed nation, to 4.4 years (the red dots).

What this means is that the United States has the shortest time until the principal on the $14 trillion comes due. While the U.K. has 13 years of grace and Spain has nearly 7, the noose is already beginning to tighten around the U.S.’s neck.

The U.S. 10-year Treasury interest rate has risen from 2.38% in early October to 3.34% today. One percent may not sound like much, but when interest rates rise, the U.S. government, and hence, taxpayers, must pay more just to maintain their debt.

When investors became afraid of the mess in Greece, they sold Greek bonds en masse, driving their 10-year interest rate from 6% to 13% in a single month in 2010. If the United States’ interest rates jumped 7%, taxpayers would be forced to pay nearly $1 trillion more in interest payments. If interest rates even reached 7% (the 10-year Treasury’s average since 1970), U.S. interest payments would eat up 45% of the country’s tax revenue.

As the debt grows, the precarious position of the United State not only, but the position of the dollar also worsens —as well as the position of the world that depends on it.

Under the above facts, it appears now is a good time to invest in an undervalued asset such as real estate, and highly leverage yourself in doing so. By using a 95% LTV, 30 year fixed rate mortgage, it appears I would be winning at the banks own game, assuming we have at least marginal inflation. In this scenario I'd be paying the bank back with dollars much more devalued than the dollars I borrowed and still getting the benefit of my mortgage interest deduction.

That will greatly depend on where you purchase. Buy into one of the areas that still could drop another 20 percent or more and you won't be a very happy camper. Lose enough and you might end up becoming a member of the strategic default club, losing your 5 percent down payment along with your credit.

That is a very good point.

If you know what your doing, using debt (or leverage) can be very profitable. But you have to know what your doing, otherwise, you can be in some major financial trouble.

nicholas - Wealthcycles Administrator

Taking my simplistic understanding of economic (& wealth) cycles and then adding in the expected rise in interest rates along with the inevitable inflation, it seems now would be a good time to purchase (dare I say, invest) in an undervalued asset (real estate) by using highly leveraged fixed rate debt (95% LTV, 30 year fixed). Of course the banks wouldn't like it, but as they have done unto me, I too shall do unto them. My motto will be I Owe, I Owe, while I watch silver grow.

Like other person said above. You have to know what your doing. 

Sure you could take out a loan and expect inflation to help you pay off the balance. What happens if price values fall in your area and you end up owing more than its worth. What if inflation is a few years off. 

"The market may remain irrational longer than you can remain solvent." That is a John Keynes quote. Make sure it doesn't apply to you.

nicholas - WealthCycles Administrator

I agree, It won't be easy beating them at their own game; banks may be heading down a dark alley, but they still have the power to influence or manipulate many of the rules of the game.

Does this imply that a person who through their 401k , is invested in Bonds, would notice a substantial drop ? If that holds true then wouldn't it make sense for people to not invest in bonds at all.

How is Japan staying afloat? I'm troubled by the idea that our debt could continue to rise to that level, and by then it would be too late to salvage our economy while they engineer the changing of the guard to China.

Japan looks similar to the U.S., and some good comparisons can be drawn, but Japan is quite different. The vast majority of Japan's debtholders are Japanese citizens—who aren't likely to sell their bonds and cause a massive economic catastrophe. The majority of the United States' debtholders are foreigners and institutional investors—who are more concerned about their own treasuries and clients to give a hoot about interest rates in the U.S. 

Interesting to see on the graph that the United Kingdom is doing really well compared to everyone else.

I was surprised as well. Compared to everyone else the UK is going strong. Well, as strong as you can in this economic atmosphere.

Very interesting. Interest rate will rise (in the future) as the result of debt crisis (possible default in debt repayment - 4.4 yrs is a short period).

My question: If interest rate rises for bonds, will the normal bank lending rate rises? Further bank lending rate hike will cause the real estate price to drop - another round of real estate crisis. Can you explain the missing link (my question)?

The answer to your question is yes. If government interest rates rise, then general interest rates will as well. We tried to explain this in Understanding Bonds. There is a chart at the end that shows how closely 30-year mortgage rates track 30-year Treasuries. So your interpretation is 100% correct. 


For those who are reading, lock in your interest rate now while the rate is low. Floating or variable rate is risky if interest rate is expected to rise in the future.

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