Can the US keep borrowing indefinitely?
June 19, 2014
Q: My question and concern is about the U.S. debt. It does not seem possible that we can keep borrowing without there eventually being a giant backlash against the U.S. dollar. In that scenario, seemingly safe savings accounts would be the most dangerous thing -- not only would the value of the dollars in those accounts be sinking, but the government deposit guarantee might not be worth anything. So, I'm looking at alternatives like gold and Bitcoin. Do you have any suggestions?
A: Your concerns are well-founded, though you might want to keep working on your conclusions. Let me break your question down into four parts:
- Can the U.S. keep borrowing indefinitely? According to the Office of Management and Budget, the official budget deficit is projected to be less than $700 billion this year, down from a peak of more than $1.5 trillion in 2009. So in a way, the government is making progress, but of course simply reducing the annual deficit does not represent repayment of debt outstanding. So why do people keep lending to the U.S.? Because U.S. securities are considered a risk-free source of income, and as long as investors get their interest and principal on time, they will not be overly concerned that the U.S. keeps rolling over its debt.
- Are savings accounts safe in the event of a U.S. dollar crisis? If the dollar tanked, it would hurt the relative value of U.S. bank accounts, but it would not necessarily jeopardize the principal of those accounts. The FDIC funds its insurance via levies on participating banks, so it does have a source of funding independent of the government itself.
- Are Bitcoin and gold viable alternatives? Looking at the price changes in recent years should be enough to tell you that these are speculative investments, and therefore risky. Regarding Bitcoin in particular, if you are concerned about the backing of the U.S. dollar, why are you not concerned about a form of currency that has no tax base or resources to fall back on?
- What are some other alternatives? The U.S. is so important to the global economy that there is no perfect answer to this question. In other words, if the U.S. goes down, it will drag a great many other investments and currencies in its wake. Broad-based international diversification may be the best approach. While there may not be an immediate winner if the U.S. has a currency crisis, some beneficiaries from around the world are bound to emerge eventually.
You have raised an important and complex problem. Given your recognition of its complexity, you might want to be a little more suspicious of seemingly easy answers like Bitcoin and gold.
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