The problem is that the federal debt is rising – and will continue to rise – much faster than gross domestic product, which represents America’s ability to service it.

The federal debt was equivalent to 41% of GDP at the end of 2008. The Congressional Budget Office estimates it will rise to 82% of GDP in 10 years.

According to John Taylor in today’s Financial Times, the federal debt could hit 100% of GDP in just another five years. This from Taylor:

I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget.

A 60% tax hike won’t happen. The government will attempt to inflate the problem away instead. As we have discussed in previous issues, this will radically reduce the value of your savings.

To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. This 100% increase in price levels would mean about 10% inflation for ten years.

According to Taylor, “it would not be that smooth.” He reckons it would “probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.”