Very few people believe it. The Americans totally discard it. Financial observers do not write about it. Rating agencies turn up their noses at it.

And yet, it is likely, almost certain that before 2020, the US will default on its sovereign debt. What form default will take and how it will play out is difficult to say, but a restructuring to effectively write-off part of the debt will take place. As the main creditors are found in Asia the repercussions – politically and economically – will reverberate  more acutely through this part of the world. 

Let us start by taking a look at the figures. Total debt run up by the federal government, households, states, corporations etc. amounts to approximately 400 percent of Gross Domestic Product (GDP) – a trivial sum of USD 60 trillion. Even during the great depression of the 1930s, it never went above 350 percent of GDP. Federal debt account for one-quarter of this percentage, amounting to around USD 13-14 trillion. This is not a figure that cannot be managed, but the main problem is that it continues to rise instead of being brought under control.

Under favorable conditions, net interest payments will increase from around USD 250 billion now to USD 800-900 billion in 2020. If economic growth falters, the figure will be even higher because of lower tax revenue and higher social expenditure. Almost 25 percent of the federal budget must be used for net interest payments (9 percent currently) and this item will account for something like 80 percent of discretionary spending.

The task ahead is even more daunting when one considers a basic calculation of fiscal tightening required to stabilise the debt/GDP ratio, or the even more challenging task of bringing it down. Let us assume that the US wants to stabilise its debt/GDP ratio in 2015. Denmark’s National Bank has calculated that a fiscal tightening of 2.3 percent of GDP per year is necessary – accumulated 9.2 percent. If the more ambitious target of bringing the ratio down to 60 percent in 2020 is adopted, the annual fiscal tightening is 2.8 percent and accumulated 22.4 percent. The Eurozone is much better placed with only 0.9 percent fiscal tightening required to stabilise the debt ratio and 1.4 percent to reduce the debt ratio to 60 percent in 2020 (both per year).

Sometime in a not too distant future US policymakers will come to the conclusion that the debt burden is too heavy, a millstone around the neck of the US economy. Debt servicing will ask for too much money, monetary policy will be boxed in, and an expansionary economic policy cannot be pursued because of the financial resources needed to service the debt. Foreign creditors will smell that the mood is shifting and the political system’s willingness to tax its citizens to service the debt waning.

It is often heard that the US can disregard the debt burden because of the clout of the US economy, giving foreign creditors no other choice but to hold on to US treasury bonds and hope for the best. This is true, but only to a certain extent. The global share of the US economy is constantly falling making the superpower less super and less relevant for other countries.

The main point is, however, that the US cannot and will not accept the constraints on economic policy imposed by the burden – not of the debt – but of servicing the debt (payments on interest and principal). This will constitute a barrier for lowering unemployment, an issue likely to occupy the number one slot in any domestic political battle. Therefore, rumblings will come out of the US auguring semi-protectionist measures in one form or another, and other unilateral steps indicating that the US – a cornerstone of the global economic system – is not any longer willing to play by the rules laid down by itself. In choosing between honouring its commitments and respecting the rules of the game, or stimulating the US economy, the second option will prevail.

Creditors will be left with two unenviable alternatives. One is to hold on to their assets and claim that they must be redeemed in full come what may. Another alternative is to write off a part of the US debt thereby alleviating the burden on US economic policy sufficiently to open the door to a more expansionary policy, while at the same time maintaining the US as one of the main guarantors of the global economic system. In this scenario, creditors may loose some of their investment, but stronger American growth will compensate, compared to holding on and seeing the US take unilateral steps, casting doubt over the whole panoply of rules governing the global economy.

You never know how people and countries will react, but for the global economy and for the creditors, the second alternative is by far the least risky and also the least costly one. The snag for Asia is that Japan is one of the victims, holding US$800 billion of treasury bonds and facing an even worse problem than the US. If an agreement to write off a part of the US debt is handled clumsily, Japan may end in an economic and political crisis never seen before.

It may take the US as debtor and its creditors in Asia a while to understand that these are the two alternatives they can choose from. But eventually, they will come to this realisation and agree to write off a part of US debt.

The intriguing question is whether this quid pro quo can be confined to economics or whether the Asian creditors will ask for a political price acceptable to the US. Geopolitics cannot and will not continue unchanged when the US negotiates with creditors who bailed it out.