There will always be lenders
US government securities (GOVT) are considered to be risk-free with minimal credit risk. There shouldn’t be any problems with raising more capital—at least on paper, and for the time being. China (FXI), Japan (EWJ), and a few Middle Eastern countries with current account surpluses park their excess reserves in US debt (GOVT). The other stream of lenders includes US pension funds and any institutions that need to invest to meet future obligations. The problem for the future wouldn’t be the lack of lenders but the cost of borrowing. Let’s take a look at borrowing costs in this part of our series.
How could borrowing costs increase?
As per the latest report from the Congressional Budget Office (or CBO), a 1% increase in interest rates could add $10 million in interest payments for every trillion dollars of debt. The total US debt is expected to reach $22 trillion by the end of 2018, which means an interest payment of $220 billion per year—more than 10% of the total US government revenue. That’s a large chunk of the total revenue, and if the revenue doesn’t increase, there could be problems—unless the US government continuously increases its debt limit and prints money at will. The general market observation is that if interest payments reach 12% of GDP, that country is likely to default. The United States is a long way from that outlook, as interest costs are expected to move close to 2% of GDP by 2020.
The bottom line with US borrowing is that it should continue, and the US Treasury is unlikely to face any major problems in trying to raise debt. The trouble would be for future generations that are likely to foot the bill for this excessive borrowing. The US administration, whether Republican or Democrat, tends to be myopic and ignore long-term financial consequences. In the next part of this series, we’ll explain why the United States could lose some of these lenders in the years ahead.