Over the next three decades, the Social Security system is scheduled to pay benefits $21 trillion greater than its trust fund will collect in payroll taxes and related revenues. The Medicare system is projected to run a $48 trillion shortfall. These deficits are projected to, in turn, produce $47 trillion in interest payments to the national debt. That is a combined shortfall of $116 trillion, according to data from the Congressional Budget Office…
These unsustainable figures result from demographics, rising health care costs and program design. The ratio of workers supporting each retiree, which was about 5:1 back in 1960, will fall to just over 2:1 by the next decade. People who live until age 90, a fast-growing group, will spend one-third of their adult life collecting Social Security and Medicare benefits. Today’s typical retiring couple will receive Medicare benefits three times as large as their lifetime contributions to the system, and also will come out ahead on Social Security (adjusted into present value), according to the Urban Institute and the Brookings Institution…
The federal government might just try to borrow $116 trillion over three decades, on top of the current roughly $25 trillion in federal debt held by the public. But who will lend the government this much money? China and Japan are already paring back their roughly $2 trillion in American debt holdings. It seems unlikely that other countries would step up to take on much more. The Federal Reserve is trying to reduce its own more than $5 trillion in Treasury holdings that temporarily soared during the pandemic, and cannot monetize $100 trillion in debt without hyperinflation. That leaves America’s banks, corporations and investors, which almost surely lack both the capacity and willingness to lend $100 trillion to a government that cannot control its own finances…[end quote]
Social Security and Medicare are entitlements defined and guaranteed by law. Unless the laws are changed, the scale of borrowing would crowd out borrowing needed by businesses and individuals to run the productive economy.
Lenders demand higher interest rates when they see a risk that the value of their coupon payments will decline due to inflation. Interest rates rise when the demand for borrowed money exceeds the supply of money from lenders.
If the government’s debt is bought by fiat money created by the Federal Reserve hyperinflation will result. History has seen this many times. (cf. “This Time is Different” and “The Price of Time: The Real Story of Interest.”
The bond market is not paying the slightest attention to the Macro elephant in the room. The 30 year Treasury yield is lower than the 2 year Treasury yield.
Like global climate change, the crisis caused by unsupportable government debt will build up gradually. The bond and stock markets will be profoundly affected.
Politics is not allowed on METAR so let’s keep this to a discussion of how we, as investors and individuals, can protect ourselves from the coming fiscal crisis.