Officials at several agencies have warned that a tipping point is near and that if the crisis snowballs, things will get much worse. The national debt currently stands at about $27.3 trillion, about the size of the entire U.S. economy, and is on track to double within the next 30 years, according to a report by the Council on Foreign Relations.
Over the past few months, officials at several agencies, including the International Monetary Fund, the Congressional Budget Office, and banking giant Goldman Sachs Group Inc. have said that the country’s soaring debt is a big problem, and it’s literally bigger than ever. Some have warned that this is a problem, and that some fear similar market disruptions. When former British Prime Minister Liz Truss became Prime Minister in 2022, she threw the economy into disarray.
The debacle of the British economy under Truss was due to his radical economic proposals of tax cuts and borrowing, which caused turmoil in British markets and caused the value of the pound to plummet, leading to Truss’ resignation after just six weeks in office. Announced.
In the United States, IMF officials warned that public spending and borrowing would “overheat” the domestic economy and raise financing costs for the rest of the world. Philip Swagel, head of the Congressional Budget Office, said in an interview with the Financial Times that the nation’s debt is on an “unprecedented” trajectory and is at risk of a truss-shaped economic crisis. John Waldron, president and chief operating officer of Goldman Sachs, expressed similar concerns at the Semaphore Global Economic Summit on April 18.
Lawrence Gillum, chief fixed income strategist at market insight group LPL Financial, said a truss-style market crash in the country “is a potential risk,” especially “if the budget deficit continues to widen.” Still, he said the financial collapse that hit Britain was not imminent here, as bond auctions, one of the ways the United States minimizes debt, have been well received.
He explained that the U.S. Treasury holds auctions of long-term securities most weeks to offset debt, and the buyers for these securities are typically “domestic buyers such as hedge funds and households; These include a wide variety of buyers, including hedge funds, households, and other foreign buyers. Canada and the United Kingdom have begun increasing their purchases of Treasury securities in recent years. The largest holders of foreign government bonds are Japan and China, and although both countries have reduced their exposure to government bonds, overall international demand for government bonds has not declined, Gillum said.
He said “these auctions were not all that alarming” to indicate an economic collapse similar to that experienced by Mr Truss. Instead, the scale of securities being auctioned has grown.
Still, he argued that the increase in national debt in recent years has been “significant.”
“It took the United States about 220 years to issue $11 trillion in national debt, but we’ve added $11 trillion in national debt in the last four years alone,” Gillum told Fortune, adding that the nation’s deficit spending, In other words, the government’s fiscal spending has increased, he added. The amount of expenditures is also “considerably large” compared to the amount of tax collected.
The country’s current deficit spending is $1.6 trillion, according to Treasury Department data for fiscal year 2024, and while the country has had large budget deficits for quite some time, Gillum explained: If there was no war or depression. Gillum said the current budget deficit is “between 6% and 8% of gross domestic product (GDP), which would be significantly higher without the financial crisis.”
And as the country prepares for another election year, it is important to remember that the policies of both political camps contribute to the national debt in different ways.
Debt will be a “major theme in election campaigns”
“You can’t really claim fiscal responsibility anymore because both parties are increasing deficits,” Gillum said, citing Trump’s tax cut program and Biden’s spending on anti-inflation legislation. said. In fact, several types of spending contribute to the country’s high debt, and policies are being developed by both political camps.
On the one hand, there was Biden’s Inflation Control Act of 2022, a package of tax legislation and green energy tax credits hailed as a major victory against climate change that was meant to reduce the nation’s deficit spending but actually increased. Additionally, former President Trump’s tax bill, passed in 2017 when Republicans took control of the White House and the House and Senate majorities, lowered the corporate tax rate from 35% to 21%, reducing the tax rate for most family farms and small and medium-sized businesses. Inheritance taxes for companies have also been reduced. owners.
Simply put, Gillum explained that the reason the country is in so much debt is because of “spending increases and tax cuts that are increasing the budget deficit.”
The solution is to raise taxes, said Quincy Crosby, chief global strategist at LPL Financial. “Whether you’re a Democrat or a Republican, you can choose to raise taxes. Raising taxes is very important because Americans across the country believe that billionaires should pay more taxes than they do. ” Social security without deepening debt.
After all, the national debt is certainly a growing concern for Americans. According to the Pew Research Center’s 2023 survey on public policy priorities, 57% of Americans believe reducing the budget deficit should be the top priority for the president and Congress this year. , up from 45% the previous year.
According to a report by the Center for American Progress, President Trump’s tax cut program will cost the country about $1.7 trillion at the end of 2023, and Gillum said Trump’s tax cuts will be “a big theme of the campaign.” The reason for this belief is that they have accumulated a large amount of debt. ” Combined with previous tax-cut programs pushed by former President George W. Bush and a bipartisan extension of tax cuts, the tax cuts would cost $10 trillion and account for “more than 90 percent of the trajectory change in debt ratios to date.” “In the future, they will be responsible for more than 100 percent of the increase in debt ratios,” the report said.
The report further says that the tax cuts “primarily benefited the wealthy, even though they were combined with a further expansion of the child tax credit.” President Trump’s tax cut program is expected to expire in 2025, but that could change if Trump secures a second term.
As the economy continues to grow, the costs of increased debt are hidden
The nation’s debt is now higher than ever, rising sharply in response to the government’s response to the pandemic and rising from $22.7 trillion in 2019 to more than $30 trillion in 2022, according to the Treasury Department. Gillum said. Also, no plan has been formulated. to fix it.
“Unfortunately, politicians probably won’t react until or until there’s a crisis,” Gillum said, adding: “This is one of the things we’ve identified as a potential risk.” .
Crosby said the biggest contributors to the national debt are years of rising budget deficits and massive federal spending during the pandemic, as well as spending on national emergencies like major wars and soaring health care costs. “All of the benefits expected by most Americans, especially in terms of health care and social security, as well as increased national defense spending, given the complexity of the geopolitical context, also contribute to the debt.” She admits it’s a problem that has gotten out of hand.
Indeed, the country’s high debt and budget deficits give individuals more money to shop and invest, helping move the economy forward, and “the amount of debt has not yet hindered economic growth.” ” Gillum said. But he added that high debt is exacerbating the “inflation problem”: “It certainly helped economic growth, but it also has an impact on high prices.”
