What is the US debt
Overview: What US Debt Means For Investors
National debt may cause unrest in the euro zone, for example with a view to Italy. However, the US debt is potentially more explosive. As the largest economic power, the effects on the financial markets can be serious if necessary. Equities as well as bonds would be affected.
The key is trust in the United States, with the dollar as the world's most important reserve currency. It is noticeable that the rating agency Standard & Poor’s only confirms the second-best rating, AA +. The reasons are the high national deficit and rising debts of the USA. The issue of national debt is accompanied by concerns about further economic development and the threat of falling tax revenues.
Overview of the rise in US debt
Even if the indebtedness of 106% of the GDP (gross domestic product) is modest compared to the front runner Japan with 237% and the USA lands in 12th place, the absolute numbers are breathtaking: 22.03 trillion. US dollar was the deficit in the middle of this year.
A historical overview is revealing: US debts peaked after World War II in 1950 at $ 260 billion, which was 94% of GDP. Real debt decreased by 1973, but increased noticeably under President Ronald Reagan from 1981 onwards. In the end, its supply-side economic policy plus tax cuts, also known as Reaganomics, resulted in a loss of $ 2.6 million. The debt ratio had risen dramatically to 176%. The result was high interest rates and a currency that was much too strong, accompanied by falling exports and less competitiveness. After George Bush and his son George W. Bush with the two Gulf Wars and the subsequent financial crisis, the debt was over 10.7 trillion. US dollars soared.
Obama, on the other hand, had to fight fiscal policy against the threatening consequences of the financial crisis and ended up with around 19 trillion at the end of his term in office. U.S. dollar. At the same time, however, this time was an era of economic boom. Donald Trump took advantage of this when he took up the election promise to pay off the debt within eight years, otherwise “the US would go bankrupt”. But despite economic growth, low unemployment and rising wages, US debt continued to rise.
Trump's pressure on the Fed
With higher spending and less income, the mountain of debt grows by 4 billion US dollars a day, which is slightly less than the last operating result of the Dax group SAP. In the first half of the fiscal year since October alone, the deficit was over $ 691 billion, a figure that corresponds to the market value of Alphabet (Google). And try to make another comparison: The gross profit of the airport operator Fraport would be just enough to settle the approximately 900 million US dollars in daily interest charges.
Trump has saved in some areas such as social spending or health insurance, but increased spending on the military. Above all, however, the massive tax cuts are having an impact, which are not offset by the expected income. Trump's calculation boils down to increasing the flow of money into the treasury through protectionism and higher and new tariffs.
And because interest rates have long been around 2.5% for US government bonds and make debt servicing more expensive, Trump is trying to counteract this through personal intervention at the Fed. The whole thing is called Modern Monetary Theory. It assumes that the state does not have to take the debt level into account because it can create the money and always service the debt. When inflation rises, interest rates are lowered - provided the theoretically independent central bank plays along. Here, however, Trump wants to appoint a central bank chief who is dependent on him and who implements an interest rate policy controlled by the president.
Low interest rates as an antidote
Since the Democrats are also planning high government spending, albeit with different goals, easing is unlikely. In professional circles, however, the debt is not described as worrying. With the dollar as the world's reserve currency, countries like Japan and China hold US government bonds and thus help finance the US debt. China is reducing its stocks, but is proceeding cautiously, as otherwise there is a threat of fiscal upheaval and economic turbulence.
In the USA, on the other hand, the debt spiral threatens to turn further. There is also no way out as long as companies like Amazon pay almost no taxes in their home country. And at the latest when the economy slows down, income will flow more sparsely anyway. Since the debt problem affects a large number of countries overall, it can be expected that interest rates will also be lowered rather than raised in the medium term. What could save the stock markets from the worst means less fortunate prospects for interest savers.
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