When it comes, the restructuring of America's debt will have a profound, long-term global effect.
WITH world markets taking a breather on their wild ride south it is worth wondering what is next for the US, the world's largest economy.
In short, things don't look great.
This is not the story of default, collapse and apocalyptic end-of-days. Rather, it is the story of grinding, long-term economic malaise that infects almost every part of the US economy but for some surprising reasons.
Despite recent market ructions, the major problem remains the same. The US has a boatload of debt that it needs to pay off over a reasonable time frame.
These kinds of debts don't get solved in a minute sometimes they don't get solved in a decade.
The hard truth of historical experience is generally countries do not simply pay down such high levels of debt.
Note well, Tea Party: as a general rule the problem is not solved by budget cuts, nor is it solved by new taxes.
Countries with shaky credit histories and a US-style level of debt generally default or restructure their debts and this path to default or restructure is exactly what we are seeing with Greece and probably a few of Portugal, Ireland, Italy and Spain.
It is unlikely, despite our current car-crash fascination with worst possible outcomes, that the US will either default or meet its bankers (think: China) to restructure its debts.
What is much more likely is the US will follow paths regularly used by developed countries to cut the interest bill.
Whew. No debt default by the US must mean that the world can pretty much rock along as it always did. But, sadly, no. The way the US keeps its interest bill down has a profound knock-on effect on US banks, the US economy and, by reducing the country's considerable economic influence, to us.
At its simplest, the US keeping its interest rates low on its debts effectively robs investors of the kinds of returns they might otherwise expect.
For the past couple of years academics Ken Rogoff and Carmen Reinhart have been exploring the methods used by developed countries in the past to cut high debt levels.
They note that developed countries generally have not defaulted or restructured their debts. But in a move you'd have to consider to be fairly sneaky, they largely achieve the same aims by cutting their interest bills.
These strategies include limiting the amounts of non-government debt assets held by banks on their balance sheets limiting or banning foreign debt assets and straight-out requirements for banks to hold government debt.
Other measures have included caps on interest rates for deposits in banks making government bonds more attractive and demands for superannuation funds to hold the "assets".
"Pension funds have historically provided the 'captive audience par excellence' for placing vast sums of government debt at questionable rates of return," Rogoff and Reinhart state in the working paper they released earlier this year, A Decade of Debt.
Here is the rub.
If the US is paying low rates of interest on its huge pile of debt, it pays its debts more quickly.
But it only does so by effectively ripping off the whole economy.
It is the reverse of the old saw: in this version the US socialises the gains and privatises the losses.
Banks don't make as much money on assets they hold on their balance sheet, therefore they don't return as much to their investors. Nor do they have as much cash available for other classes of investments that kick-start the economy, such as home loans or business loans.
Pension investors also don't have as much money to retire on, because they have been forced to hold low-yielding US government treasuries. The amount of money available for pension funds to invest in business is also reduced.
Why would a country impose such an economy-stifling system on the private sector?
Partly because it works: Reinhart and Rogoff estimate such measures cut the US government's interest bill by 5 per cent of gross domestic product annually between 1946 and 1955.
Also partly because there is little alternative: the US debt burden probably won't shift markedly with any level of budget cuts or new taxes.
The US doesn't want the cataclysm of defaulting on its loans.
It seems it would rather starve its banking system and rob its pension investors for years to come.
Frequently Asked Questions about this Article…
What is the main risk of the US having a very large national debt for everyday investors?
A very large US debt raises the chance of prolonged economic malaise rather than a sudden collapse. To manage the debt the US may keep interest costs low in ways that reduce returns across the economy — hitting bank profits, cutting lending, and lowering returns for pension and retirement investors.
Is a US sovereign default likely, or will the country restructure its debt like Greece?
According to the article, a US default or formal restructuring like Greece is unlikely. Instead, the US is more likely to use measures that lower its interest bill without a negotiated debt restructuring or outright default.
How might the US government cut its interest bill without defaulting?
The article explains common tactics include forcing banks to hold more government debt, limiting banks' holdings of non‑government or foreign debt assets, capping deposit rates to make government bonds more attractive, and requiring pension or superannuation funds to buy government treasuries.
How would policies that force banks to hold more government debt affect bank investors and lending?
If banks are required to hold low‑yielding government debt, they earn less on assets, return less to shareholders, and have less cash to lend for mortgages and business loans — which can slow economic growth and reduce investor returns.
What are the implications for pension funds and retirement savers if they’re compelled to hold government bonds?
Pension and superannuation funds forced into low‑yield government treasuries will likely deliver lower retirement incomes for members and have less capital available to invest in businesses, which can reduce long‑term growth and returns for everyday investors.
Does keeping US interest rates low help or hurt investors?
Keeping interest rates on government debt low helps the government pay down its debt burden more cheaply, but it effectively reduces returns for investors — the article describes this as socialising gains and privatising losses, which can harm savers, banks and pensioners.
Could US policies to lower its interest bill have wider global market effects?
Yes. The article warns that restructuring or policy choices around US debt have profound long‑term global effects: reduced US economic influence and knock‑on impacts on global markets and investor returns worldwide.
Have these kinds of measures worked in the past, and at what cost?
Historical research by Ken Rogoff and Carmen Reinhart cited in the article shows such measures cut the US government’s interest bill by about 5% of GDP annually between 1946 and 1955. They were effective at lowering interest costs but came with costs to bank profitability, pension returns and broader economic dynamism.
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