Here Is Goldman’s Chart Showing Why The US Is Headed For “Banana Republic” Status

Earlier today we discussed a report by Goldman Sachs which, when summarized, suggested that unless something significant changes in the coming years, the current US fiscal policy will lead to a debt catastrophe. In an unprecedented warning, the bank which spawned Trump’s chief economic advisor Gary Cohn, ironically the architect behind Trump’s fiscal strategy, warned that “the continued growth of public debt raises eventual sustainability questions if left unchecked.”

It is worth highlighting that for Goldman to warn that the US fiscal and debt trajectory is unsustainable is quite unprecedented, especially since it is the bank’s former President and COO who has put the US on that path.

And while we urge readers to get acquainted with Goldman’s list of concerns, all of which are very troubling, there is one specific chart which lays out clearly why the US is now headed for “banana republic” status amid developed economies when it comes to US debt sustainability, or in this case lack thereof.

That chart is below, and it shows total projected US Federal Debt on one axis and US interest expense as a % of GDP on the other. The result is the red dot in the top right.

This is how Goldman puts it:

The US appears to be headed into uncharted territory—at least for US fiscal policy—regarding the relationship between interest expense and the debt level.

As shown in Exhibit 11, interest expense considerably exceeded the current level during the late 1980s and early 1990s, though the debt level was moderate. By contrast, the debt level was slightly higher during and just after World War II than it is today, while the level of interest expense was similar.

However, we project that, if Congress continues to extend existing policies, including the recently enacted tax and spending legislation, federal debt will slightly exceed 100% of GDP and interest expense will rise to around 3.5% of GDP, putting the US in a worse fiscal position than the experience of the 1940s or 1990s.