Why Economists Are so Worried About Huge Buildup

It is essential that the United States sells its debt to investors, whether institutions, individuals or other countries. But higher debt levels cast doubt on the United States’ ability to keep its promises to continue repaying, and the more people hesitate to buy U.S. debt securities, the more the economy is affected, Rubin says.

The U.S. Treasury sold $22 trillion worth of government bonds last year, but Treasury auctions have seen weak demand recently, suggesting investors may soon struggle to absorb the huge rush of new bond issues.

The most recent auctions of 10- and 30-year bonds generated little enthusiasm as investors eyed higher interest rates and higher inflation. The United States will return to the market in May with a sale of new bonds for $385 billion.

“What would happen if we couldn’t sell the debt is we would find ourselves unable to function as an economy. The government survives on debt. If we literally couldn’t sell our debt, we wouldn’t be able to pay our bills,” Rubin said. told Business Insider in an interview.

Debt itself is inherently inflationary, meaning consumers can expect higher prices if the government doesn’t slow down its borrowing.

Indeed, debt constitutes a certain stimulus for the economy, which accelerates hiring and wage growth. If the economy is already at full employment, that also means higher inflation, according to Jay Zagorsky, an economist at Boston University.

Inflation has been at least one percentage point above the Fed’s 2% target over the past two years. Prices accelerated 3.5% year-on-year in March, the third consecutive month of higher-than-expected inflation.

A smaller budget

Higher debt could also lead to a lower quality of life for Americans, Zagorsky added. Indeed, the more the debt increases, the more the government must pay in interest to service that debt – and the less money the United States must spend on other priorities like Social Security and other crucial items of the social safety net.

The United States spent $429 billion last year on interest payments alone, according to Treasury data. This represents 240% of what the government spent together on transport, trade and housing.

“Very soon, one of the most important things the federal government is going to spend money on is not defense, not education. It’s not going to be housing, it’s going to be interest,” Zagorsky said .

Economical consequences

If investors largely lose confidence in U.S. government debt as a safe haven, it would trigger turmoil in financial markets, Rubin warned, because of the sheer volume of U.S. debt held by institutions around the world.

Worst case scenario, he sees markets collapsing if debt levels get too high and people think the U.S. might not repay.

“The trillions of dollars sitting on balance sheets around the world will significantly lose value, if not be worthless. Interest payments could be reduced. This would be a devastating blow to the global economy that would ultimately lead to chaos. We can’t let it happen,” he said.

There’s not much the government can do to stop these problems from growing, other than stop taking on so much new debt, Zagorsky and Rubin say. Technically, the government could print money to pay its dues, but that would lead to hyperinflation as the money supply skyrockets.

Robust economic growth can make debt more sustainable, but debt grows much faster than the economy: the national debt balance has increased by 86% over the past decade, while GDP has increased by 63%. , according to Fed data.

Economists aren’t sure when the national debt will become a real problem for the United States. If the pace of borrowing does not slow, Rubin predicts a crisis will materialize within the next decade.

“It starts slowly, then it accelerates quickly. Right now, I don’t think anything is imminent. I would say we have 10 years or less to resolve this problem. I think that might be the optimistic scenario” , Rubin said.