The Unprecedented Trajectory of US Government Debt: A Looming Bond Market Crisis
The United States is treading dangerously close to a potential bond market crisis, reminiscent of the one that gripped the United Kingdom 18 months ago, according to a stark warning from the Congressional Budget Office (CBO). The CBO’s concern arises as US government debt continues to break unprecedented records, leading to heightened apprehensions about the economic implications and potential damage to America’s credit rating.
The Unprecedented Growth of US Government Debt
In an interview with the Financial Times, CBO Director Phillip Swagel described the current trajectory of US government debt as “unprecedented.” The debt, which the Treasury Department puts at nearly $35 trillion, has been fueling concerns due to its significant impact on the economy and its potential consequences for America’s creditworthiness.
Swagel acknowledged that while the US was not yet experiencing the same market instability as the UK during former Prime Minister Liz Truss’ tenure, there existed a risk. Higher interest rates would cause the cost of paying creditors to increase, with the US on track to reach $1 trillion per year in 2026. Swagel noted that bond markets could react adversely under these circumstances, leading to a potential crisis.
A Cautionary Tale: Britain’s Bond Market Rout
The events that transpired in the UK during Truss’ tenure offered a cautionary tale of the potential risks involved when investors lose faith in a government’s borrowing plans. In September 2022, UK government bonds and the pound sold off sharply, as investors reacted negatively to Truss’ plan to issue more debt in order to pay for proposed tax cuts. Mortgage rates and other borrowing costs soared as investors demanded much higher premiums for owning UK debt.
The Bank of England was eventually forced to intervene, pledging to buy gilts on “whatever scale is necessary” in order to maintain stability in the financial markets. Dave Ramsden, a senior official at the central bank, warned that continued dysfunction in the market could result in a reduction of credit flowing to the real economy.
The Growing Debt Burden: US Economists’ Concerns
US government debt has been on the rise in recent years, with both Republicans and Democrats contributing to the increase through tax cuts and pandemic stimulus measures. Economists have been warning for years that the debt pile was reaching dangerously high levels, with Fitch stripping the United States of its immaculate triple-A credit rating in August 2023, citing a “high and growing general government debt burden.”
If former President Donald Trump is re-elected in November, there could be more borrowing to come. Trump has promised to extend his 2017 tax cuts and reduce the corporate tax rate from the current 21% to 15%.
The Consequences of Increased Debt Servicing Costs
Even in the absence of market instability similar to that which occurred under Truss, the increased cost of servicing debt following a rapid rise in official interest rates is siphoning off ever greater amounts of money from US public services. Interest costs on a common measure soared to $659 billion in fiscal year 2023, up 39% from the previous year and nearly double what it was in fiscal year 2020. In that same fiscal year, the government spent more to service its debt than it did on each of housing, transport, and higher education.
The Future of US Government Debt
According to the CBO, US government debt is expected to continue rising. In its latest report, the CBO stated that “such large and growing debt would slow economic growth, push up interest payments to foreign holders of US debt, and pose significant risks to the fiscal and economic outlook. It could also cause lawmakers to feel more constrained in their policy choices.” This potential crisis could have far-reaching implications for the US economy and its creditworthiness.
