Five more years of (10% of GDP) deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return.
At some point, investors may start questioning the “risk-free” reputation of U.S. treasuries and demand significantly higher rates to buy U.S. debt. It’s within reason that these upset investors (“bond vigilantes” as the Wall Street Journal calls them) could push U.S. long-term rates up 3-4% or more.
Interest compounding would then add further fuel to the fire because as yields rise, it takes more government borrowing to pay interest on the growing debt. In a way, it’s not unlike a giant government-sanctioned Ponzi scheme.
In any event, while U.S and Canadian bond yields can and do diverge, America’s debt addiction could very well exert upward pressure on Canadian yields in time.
That’s a good reason to live within your means now…and pay down all the debt you can while rates are still low.
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