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What role does the current debt of the USA play?

The United States with its USD currently accounts for over 60% of the total global currency reserves held at the individual central banks (see “The role of confidence” and “The role of the USA”). For months now, it has been apparent that the other countries have grown more wary about maintaining the same level of help in shouldering the enormous debt burden of the USA. They are calling on the USA – but with only mild pressure – to curb its deficits at home. One reason for this is that the countries doubt whether the USA will ever be able to repay its debt. At the same time, however, the individual central banks abroad know that if the dollar collapses, their respective country will also fall apart.

For institutional and private investors, the attractiveness of US government bonds is quite low given the laughable interest rates and the threat of inflation. Hence, America faces the problem that it cannot keep expanding its debt at the same pace as up to now. This is the reason why the Fed is now itself buying US government bonds in the market – directly and indirectly. 

In 2008, the total public and private debt in the USA amounted to over USD 111 trillion or more than 1,000% of the annual economic output, as illustrated by the following diagram from the Dallas Federal Reserve Bank:

(GSE = Government Sponsored Enterprises / SS= Social Security)

You can go to the well once too often. Time will tell how long this paper money game can persist before it implodes. Two things are clear, however. First, it will eventually break down. And Second, the longer it continues, the sharper and further the fall will be.