The Blubber

US debt will become unsustainable and trigger default in about 20 years, if it stays on current path, per BI.

A recent analysis by the Penn Wharton Budget Model has indicated that the United States has approximately 20 years to alter its course regarding the size of its debt, or an inevitable default in some form will ensue.

The examination focused on the $26.3 trillion of US debt held by the public, excluding funds owed by the federal government to itself within the overall outstanding debt of $33 trillion.

According to the report, "Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation). Unlike technical defaults where payments are merely delayed, this default would be much larger and would reverberate across the US and world economies."

The 20-year timeline is somewhat optimistic as it assumes a future fiscal policy that will stabilize the debt. Presently, the PWBM's approach indicates that the US debt must not exceed 200% of GDP to avert severe consequences, whereas it currently stands at about 98%.

However, a more realistic threshold is closer to 175%, assuming financial markets have confidence in the government's commitment to implementing fiscal policy corrections, caution the authors Jagadeesh Gokhale and Kent Smetters.

They emphasize the potential unraveling of financial markets even at lower debt-GDP ratios when markets lose faith in the government's commitment, as bond yields will need to consistently rise to attract buyers of government debt.