BofA: U.S. national debt to hit $54 trillion in 10 years from $33.6 trillion
CBO projects a 250% debt-to-GDP ratio by 2053
Annual deficits since 2001 due to rising social costs like aging and healthcare
Debt interest rises 23% due to high rates, exceeding defense budget
Doubts about U.S. debt repayment, urgent need for fiscal measures
Mandatory spending reduction and tax hikes are inevitable
“The U.S. fiscal deficit will be a more severe problem than ever before in history.” -Larry Summers, former U.S. Treasury Secretary)
Warnings are pouring out from Wall Street about the possibility of the United States, the world’s most powerful nation, falling into a debt crisis. The country is accruing astronomical national debt due to chronic fiscal deficits, and the repayment burden is rapidly increasing due to high-interest rates. The U.S. government’s annual interest burden has exceeded the defense budget for a year. Economists and Wall Street moguls have pointed out that the U.S.’s fiscal operations are no longer sustainable.
Credit rating agencies are predicting that the strong credit of the U.S., a reserve currency country, will no longer offset the problems of fiscal deficits and debt repayment risks. Moody’s, one of the top three global credit rating agencies, downgraded its rating outlook from ‘stable’ to ‘negative’ on the 10th (local time). This comes three months after Fitch downgraded the U.S.’s national credit rating from the highest AAA to AA+. Concerns are spreading that if the U.S. government fails to escape from the shackles of fiscal deficits and debt, the reality of U.S. government bonds defaulting and national insolvency could become a reality.
U.S. National Debt to GDP Ratio Expected to Reach 250% in 30 Years
Bank of America (BofA) estimated on the 14th that the U.S. national debt, currently at $33.6 trillion, will increase to $54 trillion by 2033. This is more than the combined Gross Domestic Product (GDP) of China, Japan, Germany, and India. The national debt is estimated to increase by $5.2 billion per day and $218 million per hour for the next 10 years, resulting in a 60% increase in the national debt after 10 years.
The Congressional Budget Office (CBO) of the U.S. predicts that the national debt-to-GDP ratio, currently at 100%, will soar to a maximum of 250% by 2053. In an optimistic scenario where discretionary spending is drastically reduced to half of the GDP, the ratio will still reach 181% in 30 years. If spending continues to increase at the current rate, it is predicted to reach 250%.
The U.S. national debt is already increasing rapidly. From $23.2 trillion at the end of March 2020, just after the outbreak of COVID-19, it has now surpassed $33 trillion, an increase of 45% in just three and a half years.
The fiscal deficit has grown, leading to an increase in national debt. The U.S. government has been running deficits yearly since recording a fiscal surplus in 2001. The deficit is also increasing. The fiscal deficit for the 2023 fiscal year is $1.7 trillion, a 23% increase from the previous year. The government’s expenditures exceed its revenues, resulting in deficits. The repeated issuance of government bonds to cover these deficits has rapidly increased the accumulated national debt.
The fiscal deficit has grown due to increasing social and economic structural costs, such as an aging population and rising healthcare costs. Historically, the U.S. government’s expenditures have increased significantly during national emergencies such as the Great Depression and World War II, leading to deficits. However, the current situation is different. The baby boomer generation’s retirement, in particular, has led to a rapid increase in social security costs such as Medicare. The U.S. population aged 65 and over is expected to surge from 56.1 million in 2020 to 80.8 million in 2040 and 94.7 million in 2060, so social security expenditures are expected to increase even more in the future.
While social costs have increased significantly, the government’s revenue has not kept up. The U.S. federal government collected $4.9 trillion in revenue last year, but expenditures were higher at $6.3 trillion. In a situation where the fiscal deficit needs to be reduced, former President Donald Trump implemented tax cuts, and current President Joe Biden has worsened the situation throughout the country through expansionary fiscal policy. Biden, in particular, has implemented a series of industrial policies, such as the Semiconductor Support Act (CSA) and the Inflation Reduction Act (IRA), which distribute subsidies, and has increased government spending by getting involved in two fronts, the Israeli war and the Ukrainian war.
U.S. Government’s Annual Interest Burden Reaches Defense Budget Level… Deficit Reduction and Tax Increases Inevitable
Although the U.S. government is burdened with a massive pile of debt, concerns about debt repayment were minimal due to low-interest rates. However, after COVID-19, the Federal Reserve (Fed) significantly raised the benchmark interest rate to absorb the released liquidity. Since March of last year, the benchmark interest rate has been raised from 0~0.25% to 5.25~5.5% in just a year and a half. With the size of the U.S. national debt itself increasing significantly and the interest cost skyrocketing, the government’s burden has risen rapidly. The interest on government bonds that the U.S. government bore in the 2023 fiscal year was $879.3 billion, a 23% increase from a year earlier ($717.6 billion). This accounts for about 15% of the total annual budget of $5.8 trillion, exceeding the U.S. defense budget ($858 billion). Jeffrey Gundlach, the CEO of DoubleLine Capital, known as the ‘Bond King of Wall Street,’ pointed out that “the enormous fiscal deficit could eventually overwhelm the government’s ability to repay its debt” and that “the government cannot be run at the current interest rate level.”
The imbalance in the supply and demand of U.S. government bonds has intensified in the market, which has been watching the government with anxious eyes. The U.S. government, suffering from chronic deficits, has continued to issue government bonds to cover the fiscal deficit, and investors have been unable to digest the flood of U.S. government bonds. The decrease in the proportion of U.S. government bonds held by foreign investors is noticeable. As of June this year, the proportion of U.S. government bonds held by foreign investors is 30.4%. This is a significant decrease from 56.1% in June 2008 and 41% at the end of 2019. Amid concerns about an increase in the supply of government bonds due to the U.S. fiscal deficit, coupled with the Fed’s interest rate hike, the yield on 10-year U.S. government bonds surpassed the 5% mark for the first time in 16 years last month.
Although the market’s trust in the U.S., which currently holds the dollar hegemony, can be considered absolute, there are even observations that a point may come when even U.S. bonds, the strongest in the world, are shunned if the market starts to question the U.S.’s ability to repay its debt. Accounting firm Deloitte stated, “If global investors conclude that the U.S. is not in a position to repay its debt, there will be a phenomenon of selling off U.S. government bonds,” and “This (U.S.) plane will suddenly stop and eventually crash.” Maurice Obstfeld, senior economist at the International Monetary Fund (IMF), expressed concern, saying, “If trust in the U.S. government’s ability to repay the principal and interest on its debt is broken, it will bring about destructive results in the global financial market.”
Experts warn that measures to stop the U.S. fiscal deficit surge are urgently needed. They point out that increasing the debt limit is only a ‘patchwork prescription’ to prevent an immediate default. It is inevitable to gradually reduce mandatory expenditures, which account for two-thirds of total federal spending, and increase taxes. Stanley Druckenmiller, a legend in the hedge fund industry, predicted, “The U.S. federal government has spent a tremendous amount in the past few years,” and “It will ultimately lead to difficult choices such as social security cuts.” Former Secretary Summers emphasized, “The government tried to reduce the fiscal deficit through tax increases and spending cuts (during my tenure as Treasury Secretary),” and “We need to secure revenue before painful spending cuts.”
Some predict that the Fed will eventually step in as the savior of the U.S. government. Michael Hartnett, an investment strategist at BofA, indicated, “The central bank is likely to introduce policies such as quantitative easing (buying U.S. government bonds) and yield curve control (negative to the value of the U.S. dollar) within the next few years.”
By. Kwon Haeyoung
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