National debt as a ticking time bomb: What dangers does this pose for savers and investors?

Neue Zürcher Zeitung Germany National debt as a ticking time bomb: What dangers does this pose for savers and investors? Article by Michael Ferber • 19 hours • 6 minutes reading time Whether Kamala Harris or Donald Trump moves into the White House after the presidential election, US national debt is likely to continue to rise. National debt is rising worldwide. The trend is particularly worrying in the USA. US national debt has increased massively in recent years and currently stands at 99 percent of gross domestic product (GDP). According to the US Congressional Budget Office, it is expected to grow to 116 percent of GDP by 2034 - the highest level ever recorded. Given the generous campaign promises made by the two candidates ahead of the US presidential election in November, debt could rise even further. Neither Donald Trump nor Kamala Harris are prepared to do anything about the national debt, which has grown to almost 35.7 trillion dollars, the think tank Committee for a Responsible Federal Budget announced this week. Under a renewed presidency of Donald Trump, the US national debt is likely to increase by a further 7.5 trillion dollars if he implements his plans. If Kamala Harris were elected and implemented her plans, the national debt would increase by 3.5 trillion dollars, according to the think tank. National debt is exploding How long can this "debt orgy" continue? "If something cannot go on forever, it will stop," said the American economist Herbert Stein in a panel discussion on the rising US national debt in 1986. But this moment is being delayed further and further, and the negative trend in US national debt has continued over the past decades. "Governments almost never try to gain a profile by reducing debt," said Gerhard Schwarz, President of the Progress Foundation, at the end of September at an event organized by the liberal foundation on the topic of the sustainability of national debt. The ways out of the high level of debt - inflation and the state's access to private assets - are ultimately both so unpopular and painful that politicians shy away from them. Another solution could be stronger economic growth. But given the dimensions, it seems unlikely from the current perspective that the American economy will grow out of the debt problem. Several scenarios are conceivable as a result of the high level of debt In addition to the USA, other industrialized countries are also massively indebted. This unresolved problem hangs like the sword of Damocles over politics and the financial markets. In order to protect their private assets, German and Swiss savers should also address the issue and be prepared for various scenarios. Muddling along as the main scenario: Ivan Adamovich, head of the multi-family office Private Client Bank, expects that debt accumulation in the USA could continue for a good while without causing massive consequences. "The possibilities for financing this are far from exhausted," he says. He cites Italy and Japan as (negative) examples. In Italy, banks finance a large part of the national debt, and in Japan, with its national debt of around 250 percent, the central bank, the Bank of Japan, has now bought up large parts of the national debt. Doubts about the USA are growing: Despite this, doubts about the USA as a reliable debtor have grown in recent years. "Since the financial crisis, fiscal policy has lost all sense of proportion," says Harald Preissler, capital market strategist at asset manager Bantleon. Even in phases of strong economic growth, politicians have failed to counteract the increase in spending. The rescue packages for the economy during the Corona pandemic ultimately exceeded everyone's imagination. Preissler also considers the increase in interest expenses to be worrying, as this reduces the scope for political action. According to the new country study by the independent Zurich credit research company Independent Credit View (I-CV), debt service in the USA is expected to rise to 12.8 percent of budget revenues this year. In 2019, it was 8.4 percent. In addition, polarized politics and the lack of consensus on budget consolidation are jeopardizing the sustainability of debt. In addition, the unfavorable demographic development is driving up social spending. Social and health spending are part of the so-called mandatory spending to which the federal government has committed itself in the long term. Around 60 percent of spending is tied up. The US national debt is like a "ticking time bomb," says Preissler. As in other industrialised countries, social security systems would need to be realigned to cope with demographic change.