May 9, 2024, the United States Capitol Building in Washington, USA.
Kelly Greenlee Beale | Reuters
Government debt has increased nearly 50% since the early days of the coronavirus pandemic, causing serious concern on Wall Street and in Washington.
Federal IOUs currently stand at $34.5 trillion, about $11 trillion above March 2020 levels.
Concerns about such eye-popping numbers have been largely limited to partisan rancor on Capitol Hill and watchdog groups like the Committee for a Responsible Federal Budget. In recent days, however, the discussion has spread to heavyweights in government and finance, with even a prominent Wall Street firm wondering whether the costs associated with debt pose a significant risk to stock market gains.
“We are facing a huge structural deficit, and sooner or later we have to address it, and the sooner the better,” Fed Chairman Powell said in a speech to bankers in Amsterdam on Tuesday.
While Powell has studiously avoided commenting on such issues, he encouraged viewers to read recent reports Congressional Budget Office Report On the state of the nation’s finances.
“Everyone should read what they’re posting about the U.S. budget deficit and should be very concerned, and it’s something that elected people need to act on sooner rather than later,” he said.
Debt and deficit uncharted territory
In fact, the Congressional Budget Office numbers are ominous as they outline the likely paths of debt and deficits.
The regulator estimates that total debt held by the public, currently at $27.4 trillion (excluding intra-government debt), will rise from 99% of GDP today to 116% over the next decade. This would be “a greater amount than at any time in the history of the country” The Congressional Budget Office stated in its latest update.
Soaring budget deficits have been pushing up debt, and the Congressional Budget Office expects things to only get worse.
The agency predicts a $1.6 trillion shortfall in fiscal 2024 – which already reached $855 billion in the first seven months – growing to $2.6 trillion by 2034. Growth to 6.1% in 10 years.
“Since the Great Depression, deficits have exceeded this level only during and shortly after World War II, the 2007-2009 financial crisis, and the coronavirus pandemic,” the report noted.
In other words, such high deficit levels are seen primarily during economic downturns, rather than the relative prosperity the U.S. has enjoyed for much of its life following the brief plunge following the declaration of the pandemic in March 2020. Keep the deficit within 3% of GDP.
JPMorgan CEO Jamie Dimon discussed the potential long-term impact of debt in an interview with London’s Sky News on Wednesday.
“The United States should clearly realize that we must pay more attention to our fiscal deficit problem, which is important to the world,” the head of the largest U.S. bank by assets said.
“At some point it’s going to cause problems, why wait?” Dimon added. “The problem will be caused by the market, and then you will be forced to deal with it, and probably in a more uncomfortable way than if you had to deal with it in the first place.”
Similarly, Ray Dalio, founder of Bridgewater Associates told the Financial Times A few days ago, he worried that soaring U.S. debt levels would make U.S. Treasuries less attractive, “especially as international buyers worry about the U.S. debt situation and possible sanctions.”
So far, that’s not the case: Foreign holdings of U.S. federal debt hit $8.1 trillion in March, up 7% from a year earlier, according to data released by the U.S. Treasury Department on Wednesday. Risk-free Treasuries are still seen as an attractive place to park cash, but that could change if the U.S. doesn’t get its finances under control.
market impact
More immediately, there are concerns that rising bond yields could spread to the stock market.
“The big and obvious problem is that U.S. federal debt is now on a completely unsustainable long-term trajectory,” analysts at Wolff Research said in a recent report. The firm worries that unless the U.S. fiscal situation is in order Orderly, otherwise the “bond vigilantes” will go on strike and rising interest costs will crowd out spending.
“Our sense is that policymakers (of both parties) are unwilling to seriously address America’s long-term fiscal imbalances until markets begin to push back hard against this unsustainable situation,” Wolf analysts wrote. “We believe policy It is likely that policymakers and the market are underestimating projected future net interest costs.”
net interest on debtTotal government debt payments, minus investment income, totaled $516 billion this fiscal year. That’s more than the government spends on defense or Medicare, and about four times what it spends on education.
The presidential election may have some minor impact on fiscal conditions. Debt has soared under President Joe Biden and has escalated further under his Republican challenger, former President Donald Trump, following an aggressive spending response to the pandemic.
“The election is likely to change the medium-term fiscal outlook, although perhaps to a greater extent than people expect,” Goldman Sachs economists Alec Phillips and Tim Krupa said in a note. Think smaller.
A Republican sweep could lead to an extension of the expiring corporate tax cuts Trump pushed for in 2017 — corporate tax revenue has roughly doubled since then — while a Democratic victory could lead to Taxes increased, although “much of it is likely to go to new spending,” Goldman Sachs economists said.
The biggest issue with the budget, however, is Social Security and Medicare spending, both of which appear unlikely to be reformed in an election “under any circumstances,” Goldman said.
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