Will the USA go bankrupt?

During the Cold war, there was a popular slogan that Capitalism will fall simultaneously with America. This phrase was popular not so much of the difficulties of the USA, but because of the propaganda war between two belligerent sides (Capitalist vs Communism). After the end of the Cold war, this slogan was forgotten- the USA was the only remaining superpower after the collapse of the Soviet Union and their power looked indisputable.

But after the World Economic Crisis (2007–2008) which came primarily from the USA, the world recognizes how the world economy depends on the prosperity of Uncle Sam-if there are economic problems there, they will affect the entire world. The permanent budget deficit and constant increase of the debt of the USА alarmed the world with the old slogan-that America will go bankrupt.

With so large army, many military bases across the world and expensive wars (the previous wars against Afghanistan and Iraq had cost trillions for American taxpayers) … it is not surprising that American debt is skyrocketing… but how much debt can take the USA? Yes, almost every country in the world has debt, but every country has limits on how much debt can take. Can the USA take more debt, and the situation is under control or the debt is too much and without quick and swift actions?… are they at risk of bankruptcy?

-Debt to GDP

Debt to GDP is one of the best indicators that shows how much debt is one country. The debt itself is not dangerous, but the ratio to GDP can make it risky for the economy of the country. The general rule is debt must reach no more than 60% of the GDP. A debt that exceeds 100% GDP is considered dangerous, which can lead the country to default.

Hence, how is the situation in the USA?

The current debt is high, reaching 106.1%. The worst part is not a higher debt, but the trends-the debt is continuing to increase from 2000 to 2020, the debt almost doubled. If the USA continues to increase its debt, it can reach the level of the debt of Greece. The American economy is more stable, but every country has limits on the debt that they can take. We have the exception of Japan, in which the debt to GDP ratio reaches 238.2%, but we think that Japan is rather an exception. So big heavy burden of debt doesn’t make one economy stronger, rather the opposite-the risk of bankruptcy increases.

Unfortunately, the USA is close to reaching the highest debt in its history-118.90% in 1946. It is understandable why the debt was so high, during the end of the Second World War and the huge expenses that the USA had provided to its army and allies. If we analyze the picture, it will need 4–5 years to reach this debt, if the USA doesn’t cut government spending or accelerate the economy.

-Government budget

Unfortunately, the government deficit is the policy of the American governments. For a short period between the end of the 90s and the beginning of the 20s, the USA had even a surplus, but this was for a short period of time. No wondering why the debt is so high- it is almost a permanent government policy of a constant deficit… this is not a big surprise at all when you see this graphic.

The only way to be stopped (we can’t rely on American governments, if we see the graph, you will understand why) is to have changed in the American constitution, where the government is required to spend no more than American economy produces with the exception of emergency events (In some European countries, there are such restrictions in their constitutions).

-Social Security

According to a recent estimate, the combined pension hole of all U.S. states and cities is now equal to the world’s fourth-largest economy, Germany. Also, Medicare has no money in eight years.

The most recent report on Social Security predicts insolvency in just 16 years. For Medicare, researchers are predicting just eight more years before depleting — three years earlier than previously forecast.

One of the biggest expenditures and the biggest burden of the American budget is Social Security.

Being entirely in debt, the federal government can’t help social security in terms of the need for a longer period. Therefore, let’s analyze the data:

For a little over 10 years, Social security is in permanent deficit with a forecast that the deficit will increase in the future. According to different calculations, the Trusted Fund will deplete until 2035.

If the US government doesn’t find a solution until then, it will face massive civil unrest in the country. The possible solutions are to increase the age of retirement… or to find a way to make more money. But the government doesn’t have much time left… only fifteenth years until Social Security runs out of cash.[1]

-Medicare

Medicare is one of the most important programs for older people. It provides health insurance to people 65-years old or older (In the USA, there is no universal healthcare, but only private healthcare).

It provides benefits to disabled people too. Currently, around 60 million people are using Medicare up to 90 million people in the next 30 years (The population of the USA is becoming older) and it is financed by the taxpayers and the Federal government pays the difference).

The federal government is more and more responsible for Medicare and currently is spending over 14% of its budget.[2] In the next years, because of the rising costs of healthcare in the USA and the older population which is increasing, the spending will increase, reaching 20% in 2048.

Medicare spending is expected to rise from 2.9 percent in 2018 to 5.9 percent of GDP in the next 30 years. Another factor for the higher cost is the longer life expectancy. With the current debt and deficit, without accelerating the economy, we don’t want to imagine how the future government budget will look like with so many expenses that are expected to explode.

-Interest of the debt, Interest rate on 10-years Treasury, Public debt and Percent of the Budget

We have very interesting data… if it is analyzed well, it can say almost everything. The Interest of the debt will increase from $393 Billion[3] in 2019 to almost a double in $762 billion in 2026. The debt will increase from $16 919 Billion in 2019 to $23 390 Billion in 2026. The percentage of the budget that is paying the debt will increase too -from 8.70% in 2019 to 12.90% in 2026… bigger and bigger part of the budget will be responsible for paying the debt, at the same time, the expenses for the Social Security and Medicare will increase too. We don’t see how the American budget to be balanced in recent years. The biggest problem is the bigger the debt it is, the larger part of the Federal budget will be added to pay for it. Without cutting the spending and accelerating income…the doom day is coming for the American budget.

-Private Debt to GDP

Something that is not related to the finances of the government, but it will show a better picture if we see the private debt too. The private debt is even higher than the government one and one of the highest in the world. The good news here is from 2010, the private debt is constantly dropping, reaching to 196.7%, the lowest ratio in the last three years.

If private citizens and businesses bankrupt, this will not affect the Federal government directly, but there will be consequences for the economy. Private debt is not so dangerous as the government one.

-Trade balance of the USA

Why we are analyzing the trade balance of America[4]. Some economists believe that one country can hold a higher debt if they are profiting from their export. When we analyze the data… the economy of the USA is in a permanent trade deficit. Even the new American president (Trump) with his promises is not capable to stop the permanent trade deficit. The last time when the USA had a surplus, the trade balance was in 1975… at the beginning of the 1980s, the trade deficit was constant.

Many economists have suggested that trade war with China, economic sanctions against other countries, and tariff war simply backfired.

In the current years, it is impossible to put the end of the trade deficit… another bad news for the American economy.

Conclusion

If we speak frankly, we are surprised by the results- we know that the USA had higher debt, but we thought that they would find a way to manage it. So why we are negative about American debt and the bankruptcy is inevitable if there are not radical reforms and cutting of spending:

1) Debt to GDP is continuing to increase exceeding 106% of the GDP and there are no signs that this will be stopped. The American government lives with the idea of a permanent fiscal deficit and this makes the situation worse if they don’t have money, they will borrow it.

The larger part of the budget is allocated to pay the debt, but in the next years, this will increase more and more reaching 12.90% in 2026. This means that other programs would be cut from financial funds-infrastructure projects, food stamps programs, Social security benefits… which will rise social unrest.

2)Social Security and Medicare (two of the most important programs) are in deficit and it will continue to increase due to several factors -the healthcare in the USA is the most expensive one(Healthcare cost per GDP), it will become more expensive (this is a world trend), life-expectancy will increase putting additional costs to Medicare, the population is becoming older.

3) The USA is currently the only remaining superpower (economically and militarily), but more and more other countries are challenging it. After the two costly wars with Afghanistan and Iraq, where the USA spent several trillions of dollars, achieving no significant progress, the society is tired of wars, but if the USA wants to stay in a dominant position, it must be ready for war if it is necessary.

The good example is the current conflict with Iran, if the USA is involved in another conflict in the Middle East, everything except a fast and swift victory will drain its resources and it will be involved in a new bloody, costly and long conflict… which will cost trillions of dollars…something that the USA will try to avoid.

Source:

[1]https://www.pgpf.org/chart-archive/0030_social-security-deficits-gdp available 01/2020

[2]https://www.pgpf.org/budget-basics/medicare available 01/2020

[3]Source for 2018–2026: “Tables S-1, S-4, S-9, FY 2020 Budget,” Office of Management and Budget. Available 01/2020

[4]https://www.census.gov/foreign-trade/balance/c0004.html available 01/2020