The United States has reached an extremely dangerous point in its fiscal history. Debt levels are at record highs, and interest payments are growing faster than our defense budget. This failure creates a number of major, acute questions about the government’s capacity and capability to respond to future emergency events. Last federal fiscal year, the interest payment on our national debt was higher than the federal defense budget altogether. This move reflects the increasing weight that debt has become in our country’s economy. The debt-to-GDP ratio is shooting past 120%. Experts are sounding the alarm that this could have devastating consequences for American families and the larger economy.
The ability of the federal government to pay its bills is being called into question. Before the onset of the Great Recession in 2007, the debt-to-GDP ratio was a relatively healthy 62%. Now, it has more than doubled – an impossible and unsustainable trend to maintain. With every billion dollars allocated to interest payments, funds that could improve education or infrastructure are diverted, creating a ripple effect throughout American society.
The Current State of United States Debt
It is important to understand how the broader landscape of U.S. debt has changed dramatically in recent years. It has been historically popular because people perceive it to be one of the world’s safest assets. The time of ignoring the risk from our huge national debt is over. With our accelerating load of debt, higher interest rates are desperately needed. This change will be a positive headwind on the stock market.
Douglas Holtz-Eakin, president of the American Action Forum, articulated the urgency of the situation:
“The wolf is not at the door. The ants are in the woodwork, and they are eating at the foundation.”
This metaphor so perfectly summarizes the figurative threat of the financial cliff that is quietly but steadily undermining our nation’s financial stability. With these trends continuing, a debt crisis may soon be unavoidable. Otherwise, investors will eventually lose confidence and cease to finance U.S. obligations.
Worries over fiscal sustainability are contributing to the extreme market volatility. A recent sell-off was triggered by concern over soaring deficits. With each weak recent U.S. debt auction, the fear has begun to grip the market. Indeed, U.S. stocks, bonds, and even the dollar have all suffered simultaneous declines.
Implications for Future Governance
Especially as Congress’ unwillingness to raise taxes or cut popular entitlement programs grows, the consequences of achieving such high debt levels are apparent. An estimated $3.3 trillion increase in federal deficits over the next 10 years. This $7 trillion increase will raise alarms about America’s fiscal path, especially the solvency of social security. Kristina Hooper, chief market strategist at Man Group, stated:
“This bill would be one more nail in the coffin of a country falling under an enormous debt burden.”
Hooper underscored the reality that no great power can hold onto their great power status if they are paying more on interest than they are on defense. As interest payments further outstrip critical government programs, like education and public health, Americans become understandably alarmed.
Ernie Tedeschi, director of economics at Yale’s Budget Lab, reinforced these sentiments by stating:
“The US is heading in the wrong direction.”
Tedeschi reiterated that the need for fiscal sustainability is more than an abstract economic concept. It has a very real effect on the cost of living for regular Americans. With each decision made in Washington about where the budget can be allocated, the risk for long-term negative consequences rises.
The Road Ahead
The increasing weight of that evidence points to the conclusion that America’s fiscal crises are not just cyclical, but rooted deeply in our system. With deficits deepening and interest payments rising, relief will be harder to find or too late in crisis situations. That is the grave reality experts warn awaits future administrations without a unified push to address blatantly serious encumbrances. Without reauthorization, they will be ill-equipped to respond to the next emergency.
Yet bipartisan agreement about the importance of fiscal responsibility is increasingly difficult to find. This begs certain important questions about how to go about successfully treading water in our deep fiscal waters. Policymakers should not be afraid to sacrifice short-term political expediency for long-term economic certainty.
“They’re going to make things worse than current policy. This is a bad outcome.”
With bipartisan agreement on the need for fiscal responsibility appearing increasingly elusive, questions linger about how best to navigate this challenging landscape. Policymakers must weigh short-term political gain against long-term economic stability.