How will the US debt situation play out?

[aneeqdhk]

I've been reading in various places that US National debt is increasing at unprecedented levels. I don't know much about finance and global economics. How do you think this is going to pan out? What should the layperson (US & non-US residents) do to safeguard against it?

[jordann]

Slightly above ‘average’ inflation-levels, compounded over time, creating an intrinsic tax on wealth and inflating away the debt-to-gdp ratio so it remains roughly the same or near-same levels. Combine that with an increase in retirement age, a reduction in retirement benefits, and an increase on social-security tax incrementally over the next decade. Gen Z will perhaps be the first with a retirement age of 69 (nice).

[bruce511]

Regarding retirement age;

Once upon a time it was irrelevant. Whatever age it was, you died before you hot there.

Then we decided that 60 is a good age. Most people die somewhat-soon after that, so you can store up value along the way, then spend it "after retirement". Back in the day most people entered the work force by 20 (usually a lot earlier) so nominally 40 years of work, and 5 to 10 of retirement.

Of course today lots of people go off to college and won't enter the workforce until well into their 20s. They have better health options, were better nourished in formative years, smoke less and can legitimately expect to live into their 80s.

So there's this arbitrary retirement age, which is based on life factors, but somehow its uncool to adjust the retirement age.

Let me reframe your point. Gen Z will perhaps be the healthiest generation in history. With a life expectancy into the 90s. (nice).

[kypro]

> Slightly above ‘average’ inflation-levels, compounded over time, creating an intrinsic tax on wealth

Inflation is great for asset owners to be fair... If you own property or stocks inflation is very welcome thing. Inflation sucks if you earn a fixed wage with little bargaining power. Small businesses may also struggle to pass on the inflation on to consumers.

[hayst4ck]

> creating an intrinsic tax on wealth

It's worth pointing out that it is not a tax on wealth, but a tax on both savings (held in cash) and lending (through reducing what paid back debt can buy).

Most forms of what people consider wealth track inflation, which is important because inflation is almost always a direct wealth transfer to a country's already wealthy, which makes the rich richer and the poor poorer.

[GoldenMonkey]

What I never hear with our unprecedented US debt. Currently at 120% of US GDP. Is how much wealth and assets the federal government owns.

Just in land assets - The Federal government owns 640 million acres of land. Including 47% of all the land in the west. 60% of Alaska is owned.

For example, if an individual owes 120% of their year income. Is it that bad, when that individual owns assets valued at 5-10x that?

Would the US sell off these assets? Probably not. But, it is an option. And they could sell some of these to US citizens or to the states.

But, the Federal government is incredibly asset wealthy in comparison to a simple debt vs GDP ratio.

[Jensson]

> For example, if an individual owes 120% of their year income

The government doesn't have GDP as income like an individual. An individual can easily cut down on spending without impacting their income, they can eat cheaper, consume less, move to a smaller place and still keep the same job. The same doesn't apply to countries, if the US government starts to cut down on expenses you will see that GDP figure go down a ton as well causing a massive economic crash.

[bhag2066]

Was about to say the same thing. If you wanted to make this comment a better but not perfect comparison is the US federal budget which was $6.2 trillion in 2023. Debt is $34 trillion making the ratio 550%.

Of course the US government can't spend their entire budget on debt servicing and repayment, just like a household.

[hayst4ck]

Ray Dalio exactly answers your first question in this video(45m): https://www.youtube.com/watch?v=xguam0TKMw8

The short answer is war, likely with China.

The long answer is civil unrest. Billionaires who feel threatened by people who want to re-distribute wealth (tax the wealthy), use their wealth to put "strongmen" into power to defend their interest. Strongmen destroy innovation which weakens the military, which invites enemies to challenge your strength. If the world feels that the value of your currency is under threat (and if you are at risk of losing a war, it is under threat), you lose reserve currency status, which means all of a sudden you can no longer import the goods your economy needs to function, then your economy and/or currency collapses.

> What should the layperson (US & non-US residents) do to safeguard against it?

The only way out of this is to produce more value than we spend and to tax billionaires (not for the money, but to decrease their ability to buy government influence).

We are pretty doomed until our aristocracy decides to start being responsible instead of greedy, which is unlikely.

You could also move to New Zealand. That's the plan that many of our greedy billionaires have when the consequences of their greed are fully realized... Just like a "senior" engineer writing really complex code might leave to another company when it's time to pay the maintenance cost for that complexity.

[robocat]

> You could also move to New Zealand

Might work for a short while, but in NZ we have our own deficit problem partly due to an aging population and when a lefty government is in they will want to take your wealth away.

And be careful what you wish for: a lot of people wanting the wealthy to be taxed seem to forget how wealthy they are compared to the majority of the world.

Governments tell you to save for your retirement but then want to take your savings (whether you are ultra-wealthy or just a careful saver)

[thiago_fm]

US debt is fine as it is, and US will always be able to pay it (it can just print more money).

The issue is how much of the US government budget it takes to pay the interest, which is exploding right now as interest rate is 5%+, leaving a big bill for future generations.

This money comes from the same budget that contributes to medicare, social security, maintenance of roads etc.

The big bill for future generations isn't actually something the Americans will pay, but how its currency will weaken and lose its reserve status, as it will need to print more money.

Currency debasement has a lot of negative consequences, such as... huge inflation. Prices will go up.

Currencies of other countries will become stronger and the US is a country that is heavily reliant on imports, those imports will be more expensive for the average US American resident.

There are plenty of references of high debt in history, and the most recent ones happened in Latin America, check Argentina for example.

It went from being a rich country in the 60/70s to mass poverty Today, 50 years later, making its currency completely useless and now they are trying to kill the peso and just use the dollar, a currency they do not have the printing machine.

The dollar at some point might become a currency nobody would consider parking their money with, this has really negative consequences to the US, as having a stable currency is a pre-requisite for many investments.

For reference, the average PE ratio (price-to-earnings) for US companies are at least 2x of Brazil. Brazil has a somewhat stable currency(higher average inflation), but weaker than the dollar. People are less willing to invest in Brazilian companies because there's a currency risk.

[beezlebroxxxxxx]

> I don't know much about finance and global economics.

Neither do most people on HN. In fact, "global economics" is actually filled to the brim with wild speculation. Most people have very little idea how the future will work out, or overemphasize a "model" view that abstracts the reality of global politics and economics into something like a simple y = mx + b equation and then insist on the inevitability of their model.

You need to think more about power. Where does the US's power come from? Is that likely to change? How will the political situation change in America and what effect will that have on the global reality of US power and, crucially, the perception of US power abroad? Will the USD remain the defacto standard global currency and reserve? The further you get into the future the less certain we can be about any of these questions beyond simple speculation.

[kypro]

It's hard to say much with certainty here beyond just recognising the current path is unsustainable. Obviously the debt/GDP cannot increase indefinitely without either the government ending up bankrupt, or more likely hyperinflation.

The issue I think we have today is that there's no real political motivation to fix these problems and people are unhappy and unwilling to make scarifies, such as paying higher tax or cuts to government spending.

However, the US is in a relatively strong position given many developed countries find themselves in similar positions. The US has a lot of debt, but it's not that much more than other comparable nations. The US also has more fiscal room to raise taxes as reduce its deficit.

My guess would be that other nations find themselves in a serious sovereign debt crisis first and this will worry politicians and the US public enough that drastic action is taken.

The most obvious outcome in the US is higher taxes and increases to the pension age. While European countries that take action will likely rely more on spending cuts in addition to increasing the pension age.

But this assumes that productivity isn't going to boom in the years to come from AI or something similar. A significant increase in productivity would be the best solution to this problem, but we shouldn't assume that's coming.

As an individual the best thing you can do to safeguard from this is diversification so you're prepared either way. You'll want to own assets that give you protection from inflationary or a hyper-inflation scenarios – things like gold, a diversified stock portfolio and property. The other slightly less likely risk would be some kind of economic crisis that results in a global deleveraging, in which case you'll probably want to ensure you're debt free and have plenty of savings. If you have savings, have no debt, own property, and have a some diversified investments you'll probably do okay whatever happens.

If you're anticipating a crisis and want to maximally profit from it then you'll need to decide if you think the risk is hyperinflation or an economic crisis followed by a deleveraging event similar to the great depression. If you think hyperinflation is likely then taking a ton of long-term fixed debt out now and buying assets like gold or property would be the best option. If you think a great depression event is likely then you want to ensure you're debt free and maximise your savings.

[gymbeaux]

My armchair guess is that depression is more likely, but god damn, to bet it all one way or the other…

Surely there’s some economic research to suggest hyperinflation doesn’t happen to the world powers? I’m not an expert in economics but it seems like hyperinflation is only a problem for (respectfully) dead-weight countries like Greece who could be wiped off the face of the Earth tomorrow with little global effect.

[aristofun]

It can play out anyway short term because of the numbers things and all sorts of financial manipulations gone wrong,

But long term USA is still #1 producer of value overall.

Whatever happens- us is in the better position then the rest of the world.

Long term. As long as democracy works, private property is respected and entrepreneurs are encouraged.

[mikewarot]

As the US winds down globalization, the people of the rest of the world will seek protection against inflation at home and savings will continue to flow into US Treasuries for the foreseeable future.

[gymbeaux]

“Debt: the first 5000 years” is an interesting read that addresses your question. In short the author argues that debt- especially government/country level debt- is good for the country issuing the debt and bad/a liability for the country who owns the debt. In other words, the more we “owe” China, the better off we are and the worse off China is. It’s sort of like that saying “if you owe the bank 100 it’s your problem, if you owe the bank $1,000,000, it’s their problem”. Same thing. “We” can “owe” China a billion trillion trillion dollars, but it’s all abstract. What will China do if we don’t pay? How do they call in that debt? We used their money to build the best navy in the world.

If we equate the national debt to a single person with $100k in credit card debt, the reality isn’t all that bleak. He declares bankruptcy, gets to keep his house and car, and some or all of the shit he bought with the $100k… only thing is his “score” is low for 7 years. If America were to do the same, I don’t know that anything different would happen. Some countries would stop lending to us. Some third world countries probably don’t have a choice but to lend to us. That might cause inflation or hyper-inflation since the U.S. Dollar would be devalued internationally. At the same time, if the president decided there were WMDs in Russia or Africa, we may suddenly find ourselves relieved from economic burden through conquest (like what Russia is trying to do). No one wants to sell us oil? No problem, we’ll invade The Congo or Russia. Japan had a similar situation in WWII- they in part invaded other countries for their resources. Nazi Germany as well. Two cases of the economy going in the shitter and the answer being war. But now it’s not some rinky-dink island nation or once-bitten-twice-shy Germany- it’s the United fucking States.

[seanmcdirmid]

Most of US debt is owed to US people's. Primarily, social security. Are we just going to be screwed in retirement?

China holds a small part of the debt, in treasuring bonds that they can roll over or not into new T-bills. It is more about keeping dollars from heating up their market than a need to lend money. They can simply stop doing that if the Americans decide they don't want to honor T-bills anymore, but I'm not sure what that gets us?

[gymbeaux]

Social Security was a great idea in post-depression times. I don’t think it would ever pass today- one, because so many Americans lack empathy(1) and two, because there are better systems that have been proven to work over time in countries like Sweden. The problem, as is so often the case these days, is that Republicans run their excellent propaganda machine to try to strike down social security retirement, Medicare/medicaid and food stamps without a replacement. “We don’t need a replacement!” Democrats, playing their part, are asleep at the wheel, and instead of proposing a revamp of the system to align with modern socialism (eg UBI), they simply want to kick the can down the road and keep everything as it is.

(1) https://jspp.psychopen.eu/index.php/jspp/article/view/5209/5...

[seanmcdirmid]

SS is easy to fix by just lifting the income cap on it and making it more progressive. But Republicans aren't going to do that, I guess.

Even today if you retire on SS alone, that's basically welfare that you paid for, it isn't really enough to live but might prevent you from starving to death. Thankfully, our life expectancies aren't rising so fast anymore (and actually falling a bit), or we would have a huge problem (forgive the dark humor).

[giantg2]

"SS is easy to fix by just lifting the income cap on it and making it more progressive."

That's kind of a loaded statement. Just eliminating the cap can strengthen the system, but won't fully fix it. We could fix any deficit by increasing taxes enough (eg making it more progressive). I would potentially support removing the cap, but I would want to see changes around capital gains taxation before making the tax more progressive. I think most of the deficit fixes should be through actual tax architecture changes (capital gains, AMT/deduction, etc) vs just increasing rates or adding higher brackets.

"it isn't really enough to live but might prevent you from starving to death."

I believe the benefits have decreased in real value over time. However, it was originally intended to prevent people (mostly widows, children, and elderly) from starving. It wasn't designed to be a sole retirement program - people were expected to save or buy bonds. This is a similar type of thing for other retirement topics - like the 401k was originally meant to be supplimental. Most people in the US are extremely poorly prepared for retirement for a variety of reasons.

[gymbeaux]

I max out my 401k each year and would give my left nut to be able to opt out of SS. I know for a fact I will have that money in retirement if I’m allowed to keep it and stash it away, but will the welfare slush fund even exist by 2050- or will my years of paying into SS only hurt me? I realize it’s kind of a meme to say “SS won’t exist by the time I retire” but I think it’s fair to worry when politicians at the federal level have recently tried to nerf it (eg raising retirement age). I have no doubt in my mind that Republicans would eliminate SS entirely if they thought they could get away with it.

[giantg2]

What makes Swedish pensions a better system?

[gymbeaux]

They have three tiers of pensions- the government pension, the employer/union pension, and the private pension. The government (“public”) pension is the primary one that everyone gets, whereas the US counterpart (SS) is more “break glass in case of emergency” (by design, anyway). ChatGPT estimates if this system were in the U.S., I’d be getting around $7,000/month as a retiree, from the public and employer pensions. Private is essentially our 401k/IRA system so it could be 0, or could be substantial. Social Security pays about half that best-case, and that’s before we factor in the private pension. I like that one’s retirement is funded by both the government and the employer, and optionally by the individual. It’s clear that Americans cannot be trusted to set aside money for retirement.

I also like that Sweden looks at the highest 15 years of employment income, while US Social Security looks at the highest 35 years. I won’t have 35 years of employment if I retire at 59 1/2 (which I guess is a pipe dream anyway) so there will be 0’s for purposes of calculating average annual income, hurting my monthly SS benefit amount.

[giantg2]

I'm not sure I'd trust the ChatGPT number unless it shows its work. Is that inflation adjusted for your retirment age, adjusted for COL, including only the public pension or other parts, and what ages is it using?

An easy point of comparison is what the maximum benefit equates to in percentage of average gross income for the individual and what the taxes are for it. We see about 12% SS tax in the US and about 18% mandatory pension tax in Sweden (not counting the semi-mandatory). Benefit-wise we see earners at the ceiling getting about 30% in the US and about 20% from the mandatory portion in Sweden. Retirment ages are similar but about a couple years later for the US. Both systems have minimum retirement ages, survivor benefits, ceilings, and non-progressive fixed rates. I wasn't able to find any mention of the 15 year calculation. Also, the 59 1/2 retirment age you mentioned is not an option under SS nor Sweden's mandatory systems.

So yeah, it seems like the mandatory portion pays out less than SS, but might require fewer years of pay.

I'm not sure what criteria that we are using to determine if it's better as they seem very similar. If you want to work fewer years and get a smaller payout, that's possible under SS as well. If we want to include employer contributions as well, we would have to look at things like union employees, public sector employees, and employer contributions to DC plans in the US.

"I like that one’s retirement is funded by both the government and the employer, and optionally by the individual."

This isn't true. Participation by the individual is mandatory in either system. The only thing the government is covering under Sweden is in the event of childcare.

[tacostakohashi]

Whaddabout the Singapore debt situation, how will that play out?

[moomoo11]

We need a race to the bottom to devalue everything.

[JSDevOps]

https://en.wikipedia.org/wiki/Hyperinflation

[skhunted]

Can you explain why the U.S. will experience hyperinflation while other countries that have much higher debt to gdp ratios haven’t experienced hyperinflation? When will the U.S. experience this hyperinflation? I’ve heard this prediction for the last 40 years. How much longer must I wait to experience it?

If you are absolutely certain that hyperinflation will occur then you should borrow as much money as possible and use it to buy assets such as land and housing.

[palmfacehn]

I don't own a crystal ball, but Brent Johnson's "Dollar Milkshake" feels like a reasonable take on this.

https://www.youtube.com/watch?v=da6hMy5sp1M

[skhunted]

It’s easy to make such a convincing video. Convincing to those with no expertise in the subject. But in 5 years when it hasn’t come to fruition will you remember how wrong he (and by extension you) are? Another conman will take his place and come up with a nice sounding theory that also boils down to: gold!

[jf22]

There have been videos like this one by different people every other year to. This is just the latest one saying the same thing.

[palmfacehn]

Saying what exactly?

[palmfacehn]

I think I follow what your intended point was, but from where I stand you appear to be tilting at an imagined opponent. Maybe you can clarify by elaborating on what you imagined the 5 year prediction to be?

The "Dollar Milkshake" theory is simply something I found to be a plausible response to the inflation doom predictions of the 2008 cycle.

I did look for a concise text summary before posting the video. They didn't capture the full concept. Here's Google's infobox:

>The milkshake theory basically holds that there simply aren't enough US dollars created to keep up with the rising demand. And when the greenback rises high enough and fast enough to lead to defaults abroad, the demand for dollars swirls up and its supply shrinks, leading to an epic squeeze higher.

[skhunted]

In 5 years you’ll likely forget about this theory and this person because nothing will come of whatever predictions this person is making. For 50 years these sorts of people have been making the same sort of predictions and they have all been wrong. Empires all come to an end so eventually one of these charlatans will be right but not because of possessing insight. It’ll be a coincidence.

[gymbeaux]

I can find YouTube videos and podcasts all day long talking about the “imminent” housing crash, and while I think these discussions are important and interesting to have, they’re little more than hypotheticals or thought experiments. I’m not saying “Brent Johnson” is a quack, but I would trust Warren Buffett over him.

[palmfacehn]

You'd have to actually watch it to find that it isn't saying the things you've projected into it.

[gymbeaux]

I'm not insinuating that the video at the link is discussing the housing market, that's just a very typical example of the "fearmongering" clickbait videos I see on YouTube.

[jf22]

I've heard the US has been due for immediate hyperinflation since the early 2000s.

[AnimalMuppet]

I must be older. I've been hearing it since the 1970s.

(Note well: I do not believe that the level of US government debt is benign. I don't think it is. But existence of this level of debt, even if it's growing, does not necessarily mean that hyperinflation is just around the corner. It makes it more possible, but it is very far from a certainty.)

[giantg2]

I have a feeling it won't happen due to the way the assets are. A lot of this money is unrealized, and can't be realized in practical terms. What we end up with are massively wealthy individuals holding companies (fiat assets) rather than real assets like land. Part of what drives inflation is the demand. If most people have relatively low incomes because most of the money creation goes to a few, then there won't be increased competition for the masses. Basically the wealthy people are in a different market in many cases and the inflation of securities wouldn't be accounted for in the CPI.

These are just my own thoughts.