By Michael Koziol
“That’s with the debt we have, and what we’re planning to do is increase debt by another 25 per cent over the next 10 years. What we actually needed from the bill is a serious fiscal consolidation effort.”
Likewise, Block says the bill’s savings measures effectively concede Congress is not going to approve any such consolidation, and will simply leave the “dire” state of US debt in place.
Many analysts believe a sovereign debt crisis is a matter of when, not if. About a month ago, JPMorgan Chase chief executive Jamie Dimon said a crack in the bond market was “going to happen”.
Hamilton believes it is coming sooner rather than later. “At some point in the next 10 years, there is going to be a reckoning where the music stops and the markets say, ‘well, we’re not going to fund this any more’,” he says. “You cannot keep going along this pathway.”
A devaluing of US debt would have dire consequences for the global financial market and for Australia that would eclipse, by far, the 2008 Global Financial Crisis.
Even if such a collapse doesn’t happen on its own, says Hamilton, the US debt burden leaves it in a precarious position to deal with a crisis, such as a future pandemic, war with China, or some sort of crisis arising from the advent of artificial intelligence technology.
“There are all sorts of things we don’t know,” he says. “We’re exposing ourselves to enormous risk.”
Much of that risk depends on what happens to interest rates in coming years. Low rates between the GFC and the COVID-19 pandemic made US debt more affordable. That era is now over.
Trump has been badgering Federal Reserve chair Jerome Powell for months to lower interest rates, saying it is costing the US government hundreds of billions of dollars a year in interest payments on its debt.
But it is the long-term trajectory that matters, and Block says the consequences could be disastrous. “If those interest rates continue to go up, that could be by far the most drastic threat to the American economy and America writ large,” he says.
More than the threat posed by Russia or China? “I don’t think that’s an exaggeration.”
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