FreedomWorks Chief Economist Steve Moore joins The Bottom Line to weigh in on President Biden, who blames Republicans for 90% of the increase in the national debt.
The U.S. national debt exceeded $34 trillion this month for the first time in history, and with large deficits expected to continue, questions about the sustainability of the debt burden may grow even more.
The federal government just recorded the third-largest deficit in history when the U.S. posted a $1.7 trillion deficit in fiscal year 2023, which ended at the end of September. This comes after much of the coronavirus relief program that caused the country's two largest deficits ($3.1 trillion in fiscal year 2020 and $2.7 trillion in fiscal year 2021) has expired, and debt repayments have been made. Rising costs are an important factor.
With budget deficits remaining at historically high levels and the national debt ballooning, the US debt dilemma is turning into a debt crisis, largely due to relatively high interest rates brought about by the US Federal Reserve's anti-inflation measures. There are growing concerns that this may develop into
“Now is the time to start worrying,” Mark Goldwein, executive vice president and senior policy director at the bipartisan Committee for a Responsible Federal Budget (CRFB), told FOX Business. “There is no crisis inflection point. But the more debt and the higher the interest rates, the greater the threat to short- and long-term sustainability.”
US national debt exceeds $34 trillion for the first time in history
The US national debt exceeded $34 trillion for the first time this month. (iStock / iStock)
The exact point at which the federal debt and its servicing costs become unsustainable is an open question. A recent report from the Congressional Research Service (CRS) states, “Of particular concern is whether the new interest rate environment will reach a 'tipping point' that has a sustained and negative impact on GDP growth or a timeline for debt default. “This has the potential to accelerate…” It becomes urgent. ”
The CRS report notes that while there is no consensus among economists as to where the tipping point lies, some estimates range from 80% to 200% or more for the debt-to-GDP ratio. , explained that the United States is currently within that range. For example, the Penn Wharton Budget Model states in an October report that even under today's generally favorable market conditions, U.S. debt held by the public cannot exceed approximately 200% of gross domestic product (GDP). I can’t do it,” he pointed out.
Large deficits and high interest rates reduce the sustainability of the federal debt
The “tipping point” at which the U.S. national debt moves into unsustainable territory is an open debate among economists. (Fox News)
The Federal Reserve Bank of St. Louis found that the nation's federal debt as a percentage of gross domestic product (GDP) was 95.4% as of the third quarter of 2023, while the CRS report notes that the Congressional Budget Office “We are predicting this level.” The public debt-to-GDP ratio will reach 100.4% in FY2024 and 180.6% by FY2053. ”
“I don’t think it can be measured in precise levels, because the question is not just how much debt we have, but where it’s going and how much policy makers are taking us into. “How confident is there that there will be a pullback? The market will be looking at a combination of these questions,” Goldwein said.
Fitch downgrades our long-term rating from 'AAA' to 'AA+'
This dynamic occurred in 2023 when the United States. credit rating downgraded Both Moody's and Fitch cited “political polarization” and “fiscal deterioration” as factors contributing to their respective downgrade decisions.
“At some point they looked at us and said the political system is broken, the debt is out of control, there's no plausible path to getting the debt back on track, so we're going to demand higher interest rates. You might say we're going to start,'' Goldwein explained. “And that could lead to bidding wars and ultimately, in the worst-case scenario, a financial crisis.”
US National Debt Tracker: See how much government debt costs
Presidential administrations and Congressional majorities of both parties have contributed to the national debt of $34 trillion. (FOX News/Photo Illustration/FOX News)
Japan is often cited as an example of a developed country that has been able to cope with a relatively high public debt-to-GDP ratio of over 200% for many years without falling into a debt crisis.
But Goldwein said Japan is “kind of an anomaly” and has also been dealing with stagnant economic growth for about 30 years. Economists at the Penn Wharton Budget Model wrote in their report that a country like Japan's high debt-to-GDP ratio is “not relevant to the United States because Japan's household savings rate is much higher; This is because they are not absorbing the savings rate sufficiently,” he added. government debt. ”
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Goldwein went on to explain that the United States faces debt sustainability issues in part because interest rates continue to outpace the growth rate of the U.S. economy. “We're paying almost all of our debt over 4%, which is faster than the economy is growing, which means interest rates will really start to explode.”
High interest rates and rising maintenance costs national debt It also threatens to intensify budget debates as policymakers spend an increasing proportion of their spending on default avoidance rather than on other programs they support.
“Last year, we spent more on interest than on children or Medicaid. In a few years, interest will exceed the defense budget,” Goldwein explained. Within a quarter century, it is slated to become the single largest government program. ”
