WASHINGTON — The US total national debt topped $31 trillion for the first time on Tuesday. This is a grim financial milestone that has arrived just as the country’s long-term financial picture is about to take a turn for the worse as interest rates rise.
Threshold violations revealed in Treasury report come as historically low interest rates give way to higher borrowing costs as the Federal Reserve attempts to combat rapid inflation , occurs at the wrong time. Record levels of government borrowing to fight the pandemic and fund tax cuts were once seen as affordable by some policymakers, but these higher interest rates , making US debt more costly over time.
Michael A. Peterson, CEO of Peter G. Peterson, said: A foundation that promotes deficit reduction. “Too many people were not happy with the course of our debt, partly because interest rates were so low.”
The new numbers come at a moment of economic turmoil as investors waver between fear of a global recession and optimism that it may be avoided. On Tuesday, the market rose nearly 3%, extending its rally from Monday and putting Wall Street on a more positive path after his brutal September. The rise is partly due to government reports showing signs of a slowdown in the labor market. Investors took this as an indication that the Fed’s rate hikes, which have pushed up corporate borrowing costs, could soon begin to slow.
The Peterson Foundation estimates that higher interest rates could cost the federal government an additional $1 trillion in interest payments over the next decade. That topped his record $8.1 trillion debt cost that the Congressional Budget Office predicted in May. If interest rates on public debt are just 1 percent higher than he CBO estimates in the next few years, his spending on interest could exceed the U.S. defense budget by 2029.
After cutting interest rates to near zero during the pandemic, the Fed then began raising interest rates to curb the fastest inflation in 40 years. The latest forecast sees it rising to 4.6% by the end of next year. The previous forecast was 3.8%.
Federal government debt is different than a 30-year mortgage that pays off at a fixed rate. Governments are constantly issuing new bonds, which effectively means that borrowing costs rise and fall with interest rates.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
CBOs warned Earlier this year, a report said the growing US debt burden could cause investors to lose confidence in the government’s ability to service its debt. The Budget Office said these concerns could lead to “a sharp rise in interest rates and a spike in inflation.”
Rate hikes are likely to cut short periods of improvement in a country’s fiscal situation, as they relate to the economy as a whole. Both the CBO and the White House project that the national debt, measured as a percentage of the size of the economy, will shrink slightly over the next fiscal year before rising again in 2024. debt.
The $31 trillion threshold poses political problems even for President Biden. President Biden has put the United States on a more sustainable fiscal path, pledging to cut the federal deficit by $1 trillion over 10 years. A deficit occurs when the government spends more money than it receives through tax revenues.
Responsible Federal Budget Committee says Biden’s policies Add nearly $5 trillion Deficit since inauguration. The projections include his $1.9 trillion stimulus bill Biden signed into law, various new spending initiatives approved by Congress, and expected to cost taxpayers about $400 billion over his 30 years. Includes a student loan debt forgiveness plan.
White House budget officials in August estimated the deficit for fiscal 2022 at just over $1 trillion, nearly $400 billion less than originally projected. Biden says those numbers are the result of his policies to stimulate economic growth, such as America’s bailout plan.
“We cut the deficit by $350 billion in the first year and nearly $1.5 trillion this year,” Biden said at a Democratic National Committee event in Washington last month.
These figures obscure the effectiveness of the rescue plan, which was financed entirely by debt. Many of the deficit cuts Biden backs reflect the fact that both he and former President Donald J. Trump signed into law heavily indebted to mitigate the damage of the pandemic recession. increase. The sharp reduction in the deficit is due to policymakers not passing another large pandemic aid this year.
Biden’s Budget Office now expects the deficit to exceed previous estimates over the next three years. The main reason is the rise in interest costs due mainly to rising interest rates. Borrowing costs have risen even higher than the White House expected in recent weeks, suggesting officials may need to raise their deficit forecasts again.
“I don’t know where interest rates are going, but whatever you were thinking a year ago,” said Jason Furman, an economist at Harvard University and former chief economic adviser to President Barack Obama. , definitely need to fix it.
“A deficit track is almost certainly too expensive,” Furman added, given the rise in interest rates in recent weeks. “We used to be on the edge of ‘OK’ and now we’re past ‘OK’. ”
Understanding Inflation and How It Affects You
In recent weeks, administration officials have been paying close attention to the budget deficit. He has backed deficit-reducing moves like the climate, health and tax bills Mr. Biden signed into law in August. It complements the Fed’s efforts to keep inflation down by raising rates, if necessary. They say Mr. Biden would be happy to sign more deficit-cutting legislation in the form of higher taxes on high-income earners and large corporations.
But officials also said they were happy with the government’s forecasts for debt and deficit levels and didn’t think the country was near a financial crisis. They say the government’s inflation-adjusted interest cost, a favorable indicator of its debt burden, remains historically low as a share of the economy. They say Mr. Biden is wrong to shift fiscal priorities in response to rising interest rates.
Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview, “Our budget has a huge financial responsibility and we have a very compelling agenda for important investments and fiscal responsibility. Building an architecture: “So it would be a mistake to overtorque in response to current events.”
Government officials have said since Mr. Biden took office that expensive investment plans are financially responsible because interest rates are so low. At last year’s approval hearing, Treasury Secretary Janet L. Yellen pointed to lowest borrowing costs as a justification for ambitious spending proposals and stimulus measures.
“Neither the president-elect nor I will propose this relief without assessing the country’s debt burden,” Yellen said. “But with interest rates at historically low levels, the smartest thing we can do is to act big.”
Critics of the Biden administration’s spending initiative warn that relying on low interest rates to justify expansionary policies could hurt the U.S. economy again as the debt burden grows.
Brian Riedl, a senior fellow at the Manhattan Institute, said it was unwise for the US to commit to long-term debt based on short-term adjustable interest rates. Adding new debt as interest rates rise will fuel the fiscal fire, he said.
“Basically, Washington has been piling up debt for a long time and has been lucky to have been bailed out by low interest rates so far,” Riedl said. “But the Treasury Department has never maintained such low interest rates for so long, and the current rise in interest rates could collide with its escalating debt and have horribly expensive consequences.”