Even if the U.S. avoids some worst-case scenarios, ballooning debt and debt servicing costs could ultimately slow economic growth and make the burden unsustainable, according to a former International Monetary Fund official.
Household debt, or the amount the U.S. owes to outside creditors after borrowing from financial markets, is already about 100% of GDP, and Congressional Budget Office projections show that figure will rise to 116%, or 139%, in 2034. in 2044 and 166% in 2054.
While these levels look alarming, Japan’s massive debt demonstrates that advanced economies that borrow in their own currencies, such as the United States, can deal with their red ink, writes Barry Eichengreen, who formerly served as a senior policy adviser at the IMF and is now a professor of economics and political science at the University of California, Berkeley.
While the US enjoys the benefits of dollar dominance, deep financial markets and Federal Reserve support for Treasuries, institutional decay remains a threat, he wrote in a magazine article Project Syndicate on Tuesday.
For example, he pointed to other commentators who warned of the risk that The US defaulted on its debts under another Trump administration. But this is not the only threat.
“Even absent this dire scenario, meeting additional interest obligations as the debt ratio rises could require the federal government to cut discretionary spending, which would have negative consequences for economic growth,” Eichengreen warned.
The US must keep up with interest payments and maturing Treasury bonds, as the cost of servicing all that debt is expected to exceed defense spending this year.
A sharp rise in bond yields after the Federal Reserve began aggressive rate hikes in 2022 has pushed up interest costs. Even Treasury Secretary Janet Yellen acknowledged in May that the prospect of higher rates over the long term would make it more difficult to control deficits and debt spending.
As those costs continue to rise, the U.S. will either borrow more to pay down and increase its debt burden or cut spending on initiatives like the Biden administration’s CHIPS Act and the Inflation Reduction Act, Eichengreen said.
“But if cuts hit public investment in semiconductors, quantum computing, clean energy and education, as seems likely, the negative impact on growth could be significant,” he said. “And a sharp slowdown in growth will call into question the sustainability of the debt.”
The warning comes a week after Nobel laureate Paul Krugman played down concerns about US debt, saying there was a relatively simple way to stabilize the debt-to-GDP ratio.
He highlighted recent research on the left. Center for American Progress To achieve this goal, it is estimated that the US would need to raise taxes or cut spending by 2.1% of GDP.
“Given the political will, we could solve the debt problems quite easily,” he wrote. The newspaper “New York Times review. “To the extent that debt is a problem, it is a reflection of political dysfunction, mainly the radicalization of the Republican Party. This radicalization deeply concerns me for several reasons, starting with the fate of democracy, and the federal debt is nowhere near the top of the list. “