America’s debt cannot keep stacking up, says Jeffrey Gundlach
Subscribe to enjoy similar stories. In “The Sun Also Rises", Ernest Hemingway’s first novel, Mike Campbell, a jaded war veteran and inveterate drunk, is asked how he went bankrupt. “Two ways," he replies.
“Gradually and then suddenly". America’s government—like Mike, no stranger to serial binges and futile wars—is on its own way to bankruptcy. We have lived through the gradual part.
Under the next few presidential administrations, the national debt will mushroom beyond the government’s ability to service it, perhaps even beyond the credulity of the country’s creditors. In the coming years expect dollar debasement, debt restructuring or both. America’s sovereign-debt spiral has been building since Washington embarked on large budget deficits in the 1980s.
As the tab rose from about 30% of GDP towards 100% in the 21st century, the Treasury continued to find willing creditors. The dollar still rules as the world’s reserve currency. Inflation and bond yields tracked lower for decades.
And since 2008, under the anaesthetic appellation “quantitative easing", the Federal Reserve has shown its readiness to print more dollars to monetise away government debt. So why can’t the band play on? An interplay of forces is going to break the bank. Yields on Treasury bonds fell and fell for nearly 40 years, with the 10-year yield hitting all-time lows in 2020.
America has since entered a secular environment of rising interest rates, so the costs of servicing the national debt are rising rapidly. As securities issued at interest rates as low as 0.5% mature, the principal is being rolled into the higher rates of the spot market, at the moment 3.7 percentage points higher. Higher interest expenses feed into deeper deficits, sparking more
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