Deutsche Bank: Everyone knows that U.S. debt is unsustainable, but no one knows when it will collapse

When the U.S. debt crisis truly erupts, the consequences will be more severe than we imagine.

On Wednesday, Deutsche Bank thematic strategist Jim Reid pointed out in his latest daily chart analysis:

One of the most widely accepted facts in the financial markets is that U.S. Treasury debt is on an unsustainable path, with the biggest unknown being when it will collapse, and tariffs may accelerate the arrival of this crisis.

Reid believes that whether intentionally or purely by chance, America's "excess privilege"—the ability to borrow at a cost far below fair value—is gradually fading, and the dollar's status as a reserve currency is also weakening.

According to the report, this privilege has lowered the U.S. borrowing costs by about 70 basis points, allowing it to take on an additional 25 percentage points of debt-to-GDP ratio without increasing interest burdens, while the debt-to-GDP ratio may soar to over 200% in the next decade.

On the first trading day after Moody's downgraded the U.S. sovereign rating, U.S. stocks not only did not decline but instead closed higher. This stands in stark contrast to the 7% drop in the stock market following S&P's first downgrade of the U.S. rating in August 2011. Some analysts believe the answer is simple: "Investors have accepted the fact that U.S. debt will expand at an absurd rate... until disaster truly strikes."

U.S. Debt Doomsday Chart: A Terrifying Trajectory for the Future is Set

While Moody's cancellation of the last AAA rating for the U.S. should not shock anyone, it undoubtedly represents another crack in the financial edifice of the United States. Moody's reasoning is particularly straightforward:

They assume that the 2017 tax cuts will be extended (contrary to recent estimates from the Congressional Budget Office), which will drive a significant increase in debt and deficits, with key predictions including:

1. Interest spending plus mandatory spending will rise from 73% of federal spending in 2024 to 78% by 2035;
2. The fiscal deficit will increase from 6.4% of GDP to about 9% by 2035;
3. The debt-to-GDP ratio will rise from the current 98% to 134% by 2035;

In his analysis, Jim Reid compared these predictions with historical trends of U.S. debt and deficits as well as the Congressional Budget Office's semiannual forecasts. Although the Congressional Budget Office's baseline forecast does not include the extension of tax cuts, one of its alternative scenarios (which includes the extension of tax cuts) shows that the debt-to-GDP ratio will exceed 200% in the coming decades. For those curious about what "disaster will come" will look like in the future, it will appear somewhere along the light blue line in the debt doomsday chart.