What Is Wrong with US National Debt and How It Will Impact the Markets

What Is Wrong with US National Debt and How It Will Impact  the Markets

The haters of Donald Trump have one more reason to blame the US president: since he is in power the country's sovereign debt increased by 2 trillion dollars and now it is over 22 trillion dollars — the last time it reached this level 70 years ago.  However, Trump does not care much about it, because the crisis will probably begin when he is out of office. During the pre-election period, he promised to solve the problem with public debt. It seems like something went wrong.


The US government has some concerns to worry about. Some experts estimate that in a few years the country will have to pay more in interest on its debt than it spends on the military or medical care. In October 2018 the Ministry of the Treasury announced that the national debt will soar by 1,34 trillion dollars during 2019 — as we see, the officials underestimated the speed of its growth. The deficit reached the point of 1,4 trillion dollars in January 2019.


The Federal Reserve governor Jerome Powel stated that he was concerned about the problem. Earlier he said that the speed of debt's growth exceeds the economic growth. Trump and Powel had a conflict because the FRS chairman advocated raising the target interest rate and Donald Trump was against this initiative.


The economists believe that the United States will suffer from the consequences of a massive deficit in the long run.


In December 2018 Wall Street's bond king and respected prognosticator on all financial markets Jeffrey Gundlach emphasized that the Federal Reserve seemed to be on a "suicide mission," raising rates while the government deficit increased as a share of GDP. Growing rates make the interest payments bigger, so the central bank should lower rates.


US debt in numbers


Government debt is a measure of how much the government owes its creditors. The US debt rose rapidly during the recession caused by the world financial crisis (2007-2009). It became even worse after Donal Trump conducted a tax reform in 2017 and federal expenses went up.


It is important to understand what the number of 22 trillion dollars mean. To estimate the country's financial prosperity, you should check the debt-to-GDP ratio. By now this indicator increased by 78%. It will continue to rocket to 106% by 2029 and reach the point of 193% by 2049 — that is what analysts from Brookings Institution say. The problem is not in the debt itself but in interest payments, which tend to expand, so you need a huge amount of money to service the debt.


It is not correct to say that the US economy will crash soon. Many countries all over the world have much bigger economic problems. The American economy is signaling to reconsider the current economic policy and start acting fast to turn analysts' pessimistic forecasts into unsuccessful predictions.


How will government debt affect the stock market?


Kevin Giddis, Head of Fixed Income at Raymond James, is confident that the recession will not hit the American market in the foreseeable future. However, the change in the stock market trends is possible. After the news about the FRS raising target interest rate and the negotiations between the US and China, the American stock market went sufficiently up for the first time during the last 2 months. The analysts cannot say for sure whether the new rally started or the market's correction after the 2018 crash is taking place. We wrote in detail how the news influences the stock market here.


How will the US national debt impact the crypto market?


According to ShapeShift CEO Erik Voorhees, the soaring US debt will play in favour of the crypto market. One day new financial crisis will erupt — organizations will not be able to pay out 20 trillion dollars and the government will have to print money. As a consequence, inflation will begin.  In this case, the cryptocurrencies will become more attractive to use than fiat, and new clients will flood the market that will cause the market's growth.


Think about it: there is more than one million of US debt for every single bitcoin that will ever exist. Remember, it is only you who decides how to keep your money safe.