The US national debt has recently exceeded $40 trillion, causing economists and fiscal hawks to express concern about the nation's financial stability. The federal deficit is nearing 6% of GDP, and the interest on debt held by the public is now over $1 trillion, rivaling defense spending. This situation is compounded by rising global long-term interest rates, which are increasing borrowing costs and placing significant pressure on the US budget. Trust funds for Social Security and Medicare are projected to run out in 2032 and 2033, respectively, further highlighting the urgency of the fiscal challenges.
Treasury Secretary Scott Bessent initially downplayed concerns about the debt, suggesting that strong economic growth would allow the US to meet its obligations without substantial tax increases or spending cuts. However, his recent actions, such as attempting to manipulate the maturity structure of government debt and pledging to at least double buybacks of 30-year Treasuries, suggest a shift in strategy. These moves, intended to dampen yields on long-term bonds, have drawn criticism for undermining the Treasury's reputation for predictable debt issuance and potentially making the government more reliant on short-term debt and vulnerable to interest rate fluctuations.
Many economists and former politicians, including Paul Ryan, are skeptical of Bessent's "grow our way out" approach, arguing that sustained GDP growth alone cannot resolve the debt problem. They contend that a fiscal crisis is inevitable unless the government implements significant reforms, such as reducing spending or increasing revenues. Despite the growing concerns, bipartisan efforts to address the deficit have stalled, with both the White House and Congress continuing to pursue tax cuts and increased spending, including on a war in Iran and election security.
Analysts like David Kelly of J.P. Morgan Asset Management and Torsten Slok of Apollo Global Management believe that the bond market will ultimately force action on the debt, as investors demand higher returns for taking on the perceived risk of US long-term Treasuries. The rise in rates is attributed to factors including the Federal Reserve's response to inflation, increased demand for credit from AI companies, and a general "deficit panic." Fiscal hawks emphasize the need for concrete plans from the executive branch to address fiscal imbalances to reassure bond markets and provide economic certainty.
