The American government continues to spend more and more money, authorising the Treasury to issue more promisory notes.
All this debt will have to be paid back with compounding interest, yet the US Treasury continues to pay off old notes by issuing even more new ones. This cannot go on forever. The interest alone on the debt burden is becoming progressively less sustainable, and by some estimates could consume 100% of the nation's GDP within 50 years.
I think we can all agree that the government is not going to solve this problem until it becomes too late.
Spending less money and raising taxes is the simple and obvious solution, but it seems apparent this is not going to happen any time soon.
So what is going to happen?
Some of you seem to think the government can just print all the money it wants to pay off the debt. But America's money is becoming increasingly backed by the Treasury's debt itself. (at this time nearly half of the reserve assets held by the Federal Reserve Bank are US Treasury bonds/notes)
What if outside investors that the Treasury relies on to buy its bonds suddenly become insecure and demand higher interest rates? Then the Treasury will have to issue even more new bonds to get the revenue to pay this interest. But if the market becomes oversaturated with Treasury bonds, that could decrease the value of the dollar, since the dollar is backed by these bonds. This would cause inflation, and potentially lead to investors demanding even higher interest rates. This could initiate a vicious cycle that could spiral out of control within a short period of time, threatening the solvency of the US Treasury.
If the Treasury defaults on its debt, it will ruin the credit rating of the US Treasury for a very long time. Lower credit ratings mean investors demand higher interest rates, so it will become impractically costly for the government to ever borrow money for an emergency again. Keynesian economic "stimulus" simply will not be an option (at least until the government is able to cut costs and save enough money).