For the first time since 2007, the US government’s long-term debt interest rate crossed the 5% mark on Monday, reflecting a remarkable change in the financial landscape. Just last week Moody’s downgraded the US government’s credit rating, bringing the rating agency’s outlook on US creditworthiness in line with reality. This credit downgrade has triggered hand-wringing all around about the sustainability of the national debt—now over $36 trillion. The recent downgrade is about more than economics—it’s about the political headwinds that the country is up against.
Over time, the United States has been considered the safest of all partners in fiscal endeavors, with a virtually risk-free rate of default. Recent developments are straining this perception. Reuters notes that the yield on 30-year Treasuries went up around 0.14 percentage points. It now is at 5. This increase reflects a rising concern among investors about the long-term fiscal stability of the federal government.
In the 2008 financial crisis back then, yields on 30-year Treasuries were around 3%. The present cycle of interest rate increases started in 2021, amidst increasing inflation and economic recovery from the onset of the Covid-19 pandemic. That’s the government’s plan as it continues to stack up debt without any semblance of a plan to pay it off. Consequently, rates will continue to be high.
“The Moody’s downgrade is, effectively, a political assessment, as much as it is an economic one.” – Thierry Wizman
These were among Moody’s reasons for its downgrade, pointing to an accelerating debt load and lack of progress toward addressing that debt burden. The agency’s decision is about more than the economic potential, but about the political gridlock crippling our fiscal policy. Thierry Wizman further noted that “the political and institutional breakdown – in regard to the US’s lack of capacity to ‘course correct’, is the true meaning of the downgrade, rather than the high debt load itself.”
The financial impacts of rising borrowing costs go much deeper than just affecting government finance. Businesses, particularly small enterprises that rely on loans for sustainability and growth, will likely face increased expenses as interest rates climb. First-time homebuyers and people who want to move across town or to a different city face higher costs too due to increased borrowing rates.
Additionally, the bulk of existing homeowners have locked in fixed-rate mortgages of 15 to 30 years, shielding them from near-term rate effects. Rising government expenditure to service debt interest repayments can put pressure on government budgets and public expenditure. This strain will be felt in every sector of the economy.
In the face of these challenges, the strength of the US economy is undeniable, with low and stable prices supporting solid economic growth. The unanswered question is if this growth can be sustained given the increasing debt load and the recent increase in interest rates.