Mounting U.S. Debt Will Eventually Pose A Major Threat To Economy
The U.S. budget is expected to run a deficit of about $1.8 trillion for the fiscal year that ends in September. Even before adding in the estimated costs of the proposed healthcare reform bill making it’s way through Congress, the next couple of years will also likely see trillion dollar deficits as well.
Although inflation isn’t a concern for the time being, a lot of people are watching out for it in the corner of their eye. Noted investment guru Warren Buffet also raised concerns about the long term risks to the economy in a piece this week in the New York Times.
No one really likes to talk about it, but it’s a big problem that isn’t going away. Can we really count on a future Congress to deal with this problem in an appropriate manner? Not likely if you go by how past Congresses dodged the growing Medicare and healthcare problems to the point where the current Congress has to deal with the problem during the worst financial crisis since the Great Depression.
That being said no one really knows when or how much of the money the government lent out to financial institutions it will get back. Some people are saying taxpayers will be on the hook for most of it, while others are saying the government may actually turn a profit by selling it’s equity stakes when markets recover.
It’s not a problem as long as there is enough demand for U.S. treasuries but once it passes that tipping point all bets are off. This country hasn’t really had an inflation problem since the recession of the 1980’s but the one that’s coming could make that one look like a distant dream.
Now the Fed could fight it by raising interest rates but that would also send economic growth down at the same time. Since no one knows who the next Chairman of the Federal Reserve will be next year, we don’t know if a future Fed will place a premium on fighting inflation or maximizing employment.
There are too many variables to the problem to accurately determine how this will all play out but it is a cause for concern.
