$40 Trillion Milestone Masks Dollar System Woes

The recent milestone of $40 trillion in federal debt has sparked debate on its sustainability. However, experts argue that this figure is not alarming as it's entirely denominated in US dollars produced by the US itself.

This means that all debts can be paid exactly as promised, regardless of the 'debt limit.' A more relevant metric for assessing sustainability is the ratio of government debt to gross domestic product (GDP). As long as the interest rate on existing debt remains below the nominal GDP growth rate, this ratio will eventually shrink.

The current federal debt interest rates are indeed low, and with a stable or declining ratio of debt to GDP, it's clear that we're 'growing' out of the so-called problem. The Fed's move towards higher interest rates may impact the economy, but its effects are not as severe as they once were, given the current size of the federal debt.

The dollar system is facing challenges, particularly with Japan's dilemma. To offset its own economic problems, Japan might have to sell US bonds, causing further issues for the bond funds. However, this does not necessarily spell the end for the dollar system. China has maintained capital controls while amassing trillions in US bonds, and other countries may follow suit.