Treasury yields have increased to multiyear highs, forcing the U.S. government to pay significantly more in interest. This in turn is putting significant pressure on the budget.
America is expected to spend $870 billion, or 3.1% of gross domestic product on interest payments this year. 3.1% is nearly double the average of 1.6% of GDP since 2000. Interest costs are projected to reach 3.9% of GDP by 2034.
According to the Congressional Budget Office (CBO), the U.S. government will pay an additional $1.1 trillion in interest costs over the next decade. It is expected that interest costs are on pace to surpass defense spending this year. Only Social Security and Medicare are forecast to be bigger burdens in the coming years.
Wall Street economists are now worried that the yearslong acceleration in government borrowing by both political parties will eventually weigh on economic growth and asset prices. Campbell Harvey, director of research at Research Affiliates and a professor at Duke University’s Fuqua School of Business, said, “The debt will become a problem, but it’s very hard to know exactly when.”
Because government debt forms the foundation of the global financial system, and the dollar is the world’s reserve currency, there is confidence that the U.S. will not miss a debt payment.
That said, because the government needs to issue more bonds to fund its spending, investors are likely to demand higher yields. Ultimately, higher borrowing costs on such things as mortgages and corporate loans will slow the economy as consumer spending and business investment slacken.
The CBO projects that Federal debt held by the public will increase from a record $26 trillion in 2023 to $48 trillion by 2034. $48 trillion is eight times the amount of debt outstanding in 2008. Debt will increase from 97% of gross domestic product currently to 116% in 2034.
Our growing debt load could weaken the ability of our government to jump-start the economy out of a crisis, such as what we experienced in 2008 (Great Recession) and 2020 (Pandemic).
To solve our growing debt, we have two alternatives. In one case we can cut government expenditures. In the other case we can raise taxes. Neither of these two options is politically expedient. Thus, very few analysts expect the fiscal situation to change drastically in the near term.
When you have a substantial reduction in deficit spending, whether by raising taxes substantially or cutting spending, we could precipitate a recession. It becomes a vicious cycle.
