The annual federal deficit budget is 5% of GDP, or 7% if count some one-time excluded items. The percentage has been growing. The government has relied upon foreign investors and central banks to buy U.S. Treasury’s. The Treasury Bills have been used as the world’s money, thus absorbing the funding needs of the U.S. If foreigners decide to stop this then the dollar would drop in value and the Federal Reserve would have to monetize the deficit, creating inflation.
As long as the other major economies have so many significant contingent financial problems (the negative interest rates in the EU and Japan, the huge debts in China and Japan) then the world economy will continue operating the same way. Perhaps as EM countries become more developed they will become safer for their citizens to store funds in a local bank, etc., and then they would have a lesser need for U.S. Treasuries. Perhaps EM countries will slow down their growth rates and profitability and thus be less able to save and thus have less new funds that they need to store in a Developed country, thus depriving the U.S. Treasury market of marginal new buyers.
Most likely the current situation where the other Developed countries have significant problems and EM oligopolists want to store wealth in Developed countries will remain the same for the next several decades.
My experience includes living through the scary 1970’s when there were many “gloom and doom” news stories: 1973 OPEC created an inflationary oil shortage, 1974 Watergate and Nixon’s resignation, 1975 the fall of Saigon, 1979 the Iran 444 day hostage crisis, and of course significant, ever-growing inflation. But a decade after the end of the 1970’s, inflation became low and stable, the Internet blossomed, the Soviet Union collapsed peacefully, and oil dropped to very low prices. Thus I would doubt the doubters who issue “gloom and doom” opinions.
If we have to cut federal expenditures for foreign wars that would increase the risk that EM countries incur and thus motivate their middle class to emigrate here and work here, stimulating our economy, and it would motivate the EM oligopolists to export even more flight capital to Developed countries.
If a new era of prosperity occurs where more people have good jobs because of new technology in medicine and engineering then these jobs will provide a tax base for which to trim the federal deficit. The economic future lies in developing quality technology in highly developed countries. Quality technology includes producing honest, reliable products, and is best done by those who invented the Intellectual Property, rather than by those who stole it and made weak imitations, sold by offshore companies that don’t respect consumers’ rights.
The American way of capitalism relies on running corporations with high quality standards of profitability; by contrast many other semi-capitalist countries (whether EU, Japan, China, Russia, etc.) emphasize growth of the economy or sales or the number of jobs, rather than profitability. By failing to obtain profitability an economic system is doomed to eventually fail. Using borrowed money to build an unaffordable toll bridge, over a gigantic chasm, that fails to get enough paying customers is simply a waste of money that makes deficits worse, even if it increases GDP. Thus our system has the best chance to survive and the best chance to be able to afford a tax increase to pay down the federal debt, compared to other countries. In economics and investing it is the anticipation or discounting of future expected events that determines current value. I anticipate the U.S. has the best chance of being solvent compared to most other countries and thus the probabilities are good that people will continue to buy dollars and dollar based bonds.
It is still possible that U.S. voters could foolishly authorize excessive deficits, but at least our economic system has the best chance of working to solve the problem. The great inflation of the 1970’s was terrifying and was spiraling out of control. But eventually the authorities were able to institute painful measures that fixed it. The OPEC imposed oil shortage of the 1970’s was scary but now we are a fracker’s paradise, actually exporting oil. Other Developed countries (except Canada) lack the natural resources that we have and in many cases have significant components of the economy that are in deep trouble, in countries awash in negative interest rates and excessive central bank QE purchases of bonds.
Assuming we are overdue for a once in a decade global recession, then when it comes that will hurt EM countries and the weaker Developed countries that have goofy negative interest rates, more than it will hurt the U.S. How will Japanese and EU citizens cope with being told that their negative 0.2% yields are now negative 5% yields? Their insurance and banking industries could collapse in such a consumer unfriendly environment, making a recession become a depression. Surely that would create more capital flight into the U.S.
People should be vigilant against being misled by those who advocate excessive deficit spending and people should have faith that we are the country best qualified to survive the global debt overhang. The situation is like what Churchill said, about democracy, that it is the worst system, with the exception of all other systems.