By The national debt passed the $40 trillion mark last week.
While the record number is staggering on its face, equally concerning is that the debt more than doubled in just 10 years.
There are many reasons for this: emergency spending during COVID-19, the 2025 tax cuts, the increasing age of the American population (and related healthcare and benefits costs) and rising interest rates. It has happened no matter which party is in power in Washington.
Predictably, the $40 trillion threshold received a lot of ink, with various interest groups expressing alarm. “The more debt we take on, the more interest costs we have to bear, which now even exceed the cost of national defense,” Michael Peterson, CEO of the Peter G. Peterson Foundation, said in a statement.
He also spelled out why Americans should care: “Every trillion we add to our debt contributes to higher interest rates and inflation, increasing the mortgages, car loans and credit card bills of all Americans.”
So, What Can Be Done?
At its simplest, there are two ways out of this pickle: 1) raise revenues through faster economic growth or higher taxes, or 2) lower spending through budget cuts or austerity measures. Some combination of the two would work. But neither is politically palatable.
In the absence of action to fix the problem, interest rates are likely to remain elevated. Yields on long-term government debt have soared recently, pushing the yield on the 10-year Treasury to 4.74%, up from 3.96% prior to the start of the conflict with Iran.
Treasury Secretary Scott Bessent moved last week to lower longer-term yields, saying the federal government would buy back the longest-duration Treasurys and replace them with short-term bonds.
But the relief was short-lived, reflecting the lack of faith buyers of U.S. debt have that interest rates will drop anytime soon. Meanwhile, foreign purchases of U.S. debt have declined, with Chinese holdings at the lowest levels in 14 years.
The sizable debt accrued by companies investing in artificial intelligence also is putting pressure on the bond market as those corporate bonds compete with Treasurys.
U.S. Debt Remains in High Demand
So far, there is still strong demand for U.S. debt, as it is viewed as a safe-haven asset in times of market volatility. But buyers are demanding a higher premium for taking on the long-duration debt, perhaps a sign they are less sanguine about the future economic health of the U.S. and especially fiscal policy coming out of Washington.
“Debt is really sustainable at any level as long as there is demand,” said Sarah Hirsch, global market strategist at New York Life Investment Management. But that requires investors to have faith in the spending decisions of the U.S. government and the strength and independence of the central banking system, in this case the Federal Reserve.
But higher interest rates limit the Fed’s ability to raise rates to fight inflation. While the rate of price increases has moderated, inflation at 3.4% for the consumer price index in July is still way above the Fed’s 2% annual target.
Fed officials hold their summer research symposium later this week in Jackson Hole, Wyoming, and the gathering is often a place for a Fed chair to lay out thoughts on interest rate policy and inflation. Market observers will be watching closely when Chair Kevin Warsh gives his address on Friday.
But without the political will to tackle the problem, Americans can expect to suffer with higher prices and interest rates for the foreseeable future.
View Source Above content are taken from external website. If original source wants to remove content please contact us.
