US Economy Raises Concerns as National Debt Surpasses $40tn

The US economy has been making headlines recently, and not for the right reasons. With the national debt surpassing the $40tn mark, concerns are growing about the country's financial stability. According to Maya MacGuineas, president of the Committee for a Responsible Federal Budget, it took almost 200 years for the US national debt to reach $1tn for the first time, but now the country is spending more than that just on interest payments on its debt.

How did the US get here?

The US national debt has been rising steadily over the years, driven by public spending surges under both the Donald Trump and Joe Biden administrations. The debt has doubled in the decade since 2016, when it stood at just under $20tn. The figure is rising by about $90,000 every second, or $7.8bn a day, according to the Congress Joint Economic Committee. Eric Swanson, professor of economics at University of California and former senior economist at the Federal Reserve, notes that long-term interest rates in the US are at multi-decade highs, partly due to concerns about inflation and the extreme levels of US government borrowing.

How bad is the situation?

The situation is grim, with interest payments on government debt now 15% higher than the same period last year, according to economist Mohamed A El-Erian. The interest payments are almost 20% of tax revenue, which is larger than the defense budget. The bond market is demanding higher returns, with investors wary of the scale of the US's debt. The US is nearing its $41.1tn debt ceiling, with debt forecast to climb to about $64tn by 2036, according to the Congressional Budget Office.

What are the implications?

The implications of the US national debt are far-reaching. Households will likely face higher rates for mortgages, auto loans, and credit cards, with those on lower incomes hit hardest. There's also a secondary effect on consumers as higher borrowing costs for firms are often passed through to them via higher prices. The impact of the debt "finds its way to the pocketbooks of people one way or another," says MacGuineas. The following table compares the debt levels of G7 nations:

Other countries have had similar or higher debt levels, but the US's position as the world's largest economy and the dollar being the world's reserve currency gives it a "much longer runway to fiscally misbehave" than other countries, according to El-Erian.

What's next for the US economy?

The US economy slowed in recent months, but it is still growing at a fair rate. Economic growth means more tax revenue, which can pay for spending, whether that's on government programs or interest payments. With enough growth, the debt problem is eased, points out El-Erian. However, without sufficient growth, the US might have to look at other options, including reforming the tax system and public spending, or austerity. Debt restructuring is another option. The strategy so far employed has been a kind of financial engineering, with the Treasury department stepping in to buy back government debt, boosting demand for bonds and lowering borrowing rates. But the impact was short-lived, with long-term borrowing costs bouncing back up a day later.