How low can it go... will the US (+ rest of world) go into bankruptcy

Published on
September 23, 2022
September 22, 2022

Government spending in the US has been increasing steadily since the 1960s, moving from 28% to 37% (portion) of the GDP. Not only has the government been spending more, but also the composition of the spending has significantly changed.

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Back in the 60s, 75% of spending was discretionary, such as national defense, foreign aid, education, and transportation. Only 25% of the money spent by the government went to mandatory expenses. Mandatory expenses are expenses captured by law, such as interest on debt and social security and Medicare.

Nowadays the table has turned, and this ratio has completely changed. Around 75% of the money is going into mandatory expenses and only 25% is discretionary. And it’s expected to get worse...

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The number of people that are age 65 and older is now 2,5 times it was 50 years ago. Over the next few years, when the masses of baby boomers are turning 65+, that number is expected to rise even more. In conjunction with this rise, the number of participants in Social Security and Medicare will grow faster than the overall population. The government expects that by 2032, 100% tax revenue will go to mandatory expenses!

Let that sink in and do not forget that demographics (of a country) is one of THE strongest indicators for future growth. The "best" example is Japan, but also China will start seeing the ramifications of its 1-child policy.

Where does the money come from?

In the 1960s, 75 cents of every dollar spent by the government was funded with taxes and the other 25 came from borrowing. Today the borrowing amount increased to 60 cents per dollar. Taxes have slowly been rising from 25% to 28% of GDP, but increasing taxes is not politically popular, especially not in the USA.

How about savings?

Net National Savings are government savings, private savings, and foreign savings combined. As an example, in the 40s the government had a deficit but because of huge private savings, the net savings were still sufficient to invest in a post-war period. The Net National savings have been declining from 12% to 3% over the last decades. The deficits that are ran by the government can not be covered by private savings. If the governmental deficits continue and household are not able to save more, the Net Savings will continuously fall.

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History of debt

With increased spending, the different nature of the spending and the lack of savings, the federal debt of the US government is growing steadily to unsustainable levels (like Argentina, Turkey and many more countries). By 2032, the gross federal debt is projected to be around 45 trillion US dollars, which would be a 16.9 trillion increase from 2021, where the federal debt level was 28.3 trillion dollars. Back in 1990 this was only $3.2 trillion. *1

Two-thirds of federal debt was held by domestic investors and one-third was held by foreign investors. The largest U.S. holders of federal debt as of September 30, 2021, were the Federal Reserve (24 percent), mutual funds (13 percent), and financial institutions (9 percent). Investors in Japan and China had the largest foreign holdings of Treasury securities, together accounting for 11 percent of U.S. public debt. *2 China is not a buyer anymore, due to a number of reasons, but that’s something to pay close attention to given macro impact. More importantly BRIC (Brazil, Russia, India, China) are challenging the petro-dollar system, and it seems Saudi is flirting with this as well.

At this moment the federal government has approximately $31 trillion of debt, opposed to a $25 trillion GDP. This 125% debt to GDP ratio is the highest in US history. When broken down per capita the national debt is now around 80 thousand US dollars per person. A whopping 80k per capita! That's a lot of hotdogs, beers and a few cars...

US against the world

So how is the US doing in comparison to other countries? On a world level the United States aren’t doing toobad. Debts are rising all over the world. For example, Japan has the highest national debt in the world at 234.18% of its GDP, followed by Greece at 181.78%. China’s national debt increased from 41.54% of GDP in 2014 to 54.44% now.

In the end it’s all relative.

BUT...these levels are unsustainable and we foresee a significant "reset" in the forthcoming years where a lot of the status quo as we are used to is going to dramatically change.

It's going to be a bumpy ride, hold tight.

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