The Dangers of America's Increasing Public Debt Load

The Dangers of America's Increasing Public Debt Load
By Jeff Neal, Optionetics.com

The ever increasing national debt in the United States has many leading economists alarmed and concerned about just how long these current debt levels are sustainable. Presently, the national debt is right around $8.3 trillion, which is at a point that very well could force Congress to increase the debt ceiling. By the way, this would mark the fourth time it's happened in George Bush's presidency.

All politics aside, this rising debt level is a reminder that the country is on an unsustainable fiscal course. The current national debt most economists assert is more serious and dire now than in 1980, when it was at the $1 trillion figure. The reasons are that the public debt is larger as a share of the American economy, more than half is held by foreigners and the wave of baby-boomer retirements is no longer decades away.

A former vice chairman of the Federal Reserve contends that the United States cannot go into the next decade running deficits as the primary way of coping. Most economists agree that devoting an ever increasing share of the Gross Domestic Product [GDP] to paying off interest on the debt is not very healthy economically.

The problem is that there is a very distinct possibility that government spending will increase even more during the upcoming baby boomer retirement wave. In fact, this trend could be even worse if those who finance the debt, such as foreign investors, actually begin to demand higher interest rates due to the risk that the debt level will contribute to inflation in the United States. Currently, spending on medical care has been rising faster than the GDP.

The present $8.3 trillion total debt is comprised of two kinds of debt: the type owed to the public, which includes foreign lenders, and the kind owed from some government entities to others. The public debt is the biggest nemesis because at $4.8 trillion, it is now a much higher share of GDP than it was in 1980. Of course, the larger this country's debt becomes, the greater the risk premium that foreign investors are going to demand in the form of higher interest rates.

With the higher costs associated with baby boomer retirements, taxes are projected to be raised 50 percent just to cover the increased entitlement costs. Given all these forecasts and gloomy scenarios, it is absolutely imperative that the current administration gets a handle on their deficit spending. Otherwise the standard of living for generations down the road will be adversely impacted. Increased federal spending coupled with lower government revenues due to past aggressive tax cuts might very well be a tremendous burden in the future, bordering on economic disaster.

Happy Trading.

Jeff NealSenior
Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent

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