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Rising debt and deficits raise concerns about threats to the economy and markets
A view shows the US Capitol in Washington, USA, May 9, 2024.
Kaylee Greenlee Beal | Reuters
Concern over such staggering numbers was largely limited to partisan rancor on Capitol Hill, as well as watchdog bodies like the Committee for a Responsible Federal Budget. However, in recent days, the talk has resonated with government and financial heavyweights, and even caused a major Wall Street firm to wonder whether the costs associated with debt pose a significant risk to the stock market recovery. .
“We are running large structural deficits and we are going to have to deal with that sooner or later, and sooner is much more attractive than later,” the Fed chairman said. Jerome Powell said in comments tuesday to an audience of bankers in Amsterdam.
Although he has assiduously avoided commenting on such matters, Powell encouraged the public to read the recent Congressional Budget Office Reports on the country’s fiscal situation.
“Everyone should read the things they publish about the US budget deficit and should be very concerned that this is something that elected officials need to embrace sooner or later,” he said.
In fact, the CBO numbers are ominous as they outline the likely trajectory of debt and deficits.
The watchdog agency estimates that debt held by the public, which currently totals $27.4 billion and excludes intragovernmental obligations, will increase from the current 99% of GDP to 116% over the next decade. That would be “an amount greater than at any time in the nation’s history,” said the CBO said in its most recent update.
Rising budget deficits have driven up debt and the CBO only expects it to get worse.
The agency forecasts a deficit of $1.6 billion in fiscal 2024 – already $855 billion during the first seven months – which will increase to $2.6 billion by 2034. As a percentage of GDP, the deficit will grow from 5.6% in the current year 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 states.
In other words, such high deficit levels are common mainly in economic crises, not in the relative prosperity that the US has enjoyed for most of the time following the brief dip following the pandemic declaration in March 2020. From a global perspective, European Union member countries are required to maintain deficits at 3% of GDP.
The potential long-term ramifications of debt were the topic of an interview with the CEO of JPMorgan Chase Jamie Dimon gave to London-based Sky News on Wednesday.
“America should be aware that we have to focus a little more on our fiscal deficit issues, and that’s important for the world,” said the president of the largest US bank by assets.
“At some point this will cause a problem and why should you 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 much more uncomfortable way than if you had dealt with it in the beginning.”
Similarly, Bridgewater Associates founder Ray Dalio told the Financial Times For a few days now, he has been concerned that rising US debt levels will make Treasury bonds less attractive “particularly to international buyers concerned about the US debt picture and possible sanctions.”
So far, that hasn’t been the case: Foreign holdings of U.S. federal debt stood at $8.1 trillion in March, a 7% increase from the previous year, according to Treasury Department data released today. Wednesday. Risk-free Treasury bonds are still seen as an attractive place to store money, but that could change if the U.S. doesn’t get its finances under control.
More immediately, there are concerns that rising bond yields could spill over into equity markets.
“The obvious huge problem is that US federal debt is now on a completely unsustainable long-term path,” said analysts at Wolfe Research in a recent note. The company fears “bond watchers” will go on strike unless the US gets its fiscal situation in order, while rising interest costs crowd out spending.
“Our sense is that policymakers (on both sides of the aisle) will be unwilling to address long-term U.S. fiscal imbalances in a serious way until the market begins to react strongly to this unsustainable situation,” the researchers wrote. Wolfe analysts. “We believe policymakers and the market are likely underestimating projected future net interest costs.”
Interest Federal Reserve rate hikes complicated the debt situation. From March 2022 to July 2023, the central bank raised its short-term interest rate 11 times, totaling 5.25 percentage points, a policy tightening that corresponded to a sharp rise in Treasury yields.
Net interest on debt, which totals public debt payments minus what you get from investment income, totaled $516 billion this fiscal year. This is more than the government spent on national defense or Medicare and about four times more than it spent on education.
The presidential election could bring some modest differences in the fiscal situation. Debt soared under President Joe Biden and rose under his Republican opponent, former President Donald Trump, following his aggressive spending response to the pandemic.
“The election could change the medium-term fiscal outlook, although potentially less than one might imagine,” Goldman Sachs economists Alec Phillips and Tim Krupa said in a note.
A GOP sweep could lead to an extension of the corporate tax cuts that Trump pushed through in 2017 — corporate tax revenues have nearly doubled since then — while a Democratic victory could result in tax increases, although “much of that would likely go toward new spending.” ,” Goldman economists said.
However, the biggest problem with the budget is spending on Social Security and Medicare, and “in no scenario” regarding the election does reform of either program seem likely, Goldman said.