Soaring debt and deficits causing worry about threats to the economy and markets

Government
debt
that
has
swelled
nearly
50%
since
the
early
days
of
the
Covid
pandemic
is
generating
elevated
levels
of
worry
both
on
Wall
Street
and
in
Washington.

The
federal
IOU
is
now
at
$34.5
trillion,
or
about
$11
trillion
higher
than
where
it
stood
in
March
2020.
As
a
portion
of
the
total
U.S.
economy,
it
is
now
more
than
120%.

Concern
over
such
eye-popping
numbers
had
been
largely
confined
to
partisan
rancor
on
Capitol
Hill
as
well
as
from
watchdogs
like
the
Committee
for
a
Responsible
Federal
Budget.
However,
in
recent
days
the
chatter
has
spilled
over
into
government
and
finance
heavyweights,
and
even
has
one
prominent
Wall
Street
firm
wondering
if
costs
associated
with
the
debt
pose
a
significant
risk
to
the
stock
market
rally.

“We’re
running
big
structural
deficits,
and
we’re
going
to
have
to
deal
with
this
sooner
or
later,
and
sooner
is
a
lot
more
attractive
than
later,”
Fed
Chair

Jerome
Powell
said
in

remarks
Tuesday
to
an
audience
of
bankers
in
Amsterdam.

While
he
has
assiduously
avoided
commenting
on
such
matters,
Powell
encouraged
the
audience
to
read
the
recent

Congressional
Budget
Office
reports
on
the
nation’s
fiscal
condition.

“Everyone
should
be
reading
the
things
that
they’re
publishing
about
the
U.S.
budget
deficit
and
should
be
very
concerned
that
this
is
something
that
elected
people
need
to
get
their
arms
around
sooner
rather
than
later,”
he
said.

Indeed,
the
CBO
numbers
are
ominous,
as
they
outline
the
likely
path
of
debt
and
deficits.

The
watchdog
agency
estimates
that
debt
held
by
the
public,
which
currently
totals
$27.4
trillion
and
excludes
intragovernmental
obligations,
will
rise
from
the
current
99%
of
GDP
to
116%
over
the
next
decade.
That
would
be
“an
amount
greater
than
at
any
point
in
the
nation’s
history,”
the

CBO
said
in
its
most
recent
update.

Surging
budget
deficits
have
been
driving
the
debt,
and
the
CBO
only
expects
that
to
get
worse.

The
agency
forecasts
a
$1.6
trillion
shortfall
in
fiscal
2024
—
it
is
already
at
$855
billion
through
the
first
seven
months
—
that
will
balloon
to
$2.6
trillion
by
2034.
As
a
share
of
GDP,
the
deficit
will
grow
from
5.6%
in
the
current
year
to
6.1%
in
10
years.

“Since
the
Great
Depression,
deficits
have
exceeded
that
level
only
during
and
shortly
after
World
War
II,
the
2007–2009
financial
crisis,
and
the
corona­virus
pandemic,”
the
report
stated.

In
other
words,
such
high
deficit
levels
are
common
mostly
in
economic
downturns,
not
the
relative
prosperity
that
the
U.S.
has
enjoyed
for
most
of
era
following
the
brief
plunge
after
the
pandemic
declaration
in
March
2020.
From
a
global
perspective,
European
Union
member
nations
are
required
to
keep
deficits
to
3%
of
GDP.

The
potential
long-term
ramifications
of
the
debt
were
the
topic
of
an
interview
JPMorgan
Chase
CEO

Jamie
Dimon
gave
to

London-based
Sky
News
on
Wednesday.

“America
should
be
quite
aware
that
we
have
got
to
focus
on
our
fiscal
deficit
issues
a
little
bit
more,
and
that
is
important
for
the
world,”
the
head
of
the
largest
U.S.
bank
by
assets
said.

“At
one
point
it
will
cause
a
problem
and
why
should
you
wait?”
Dimon
added.
“The
problem
will
be
caused
by
the
market
and
then
you
will
be
forced
to
deal
with
it
and
probably
in
a
far
more
uncomfortable
way
than
if
you
dealt
with
it
to
start.”

Similarly,
Bridgewater
Associates
founder
Ray
Dalio

told
the
Financial
Times
a
few
days
ago
that
he
is
concerned
the
soaring
U.S.
debt
levels
will
make
Treasurys
less
attractive
“particularly
from
international
buyers
worried
about
the
US
debt
picture
and
possible
sanctions.”

So
far,
that
hasn’t
been
the
case:
Foreign
holdings
of
U.S.
federal
debt
stood
at
$8.1
trillion
in
March,
up
7%
from
a
year
ago,
according
to
Treasury
Department
data
released
Wednesday.
Risk-free
Treasurys
are
still
seen
as
an
attractive
place
to
park
cash,
but
that
could
change
if
the
U.S.
doesn’t
rein
in
its
finances.

More
immediately,
there
are
concerns
that
rising
bond
yields
could
spill
over
into
the
equity
markets.

“The
huge
obvious
problem
is
that
the
U.S.
federal
debt
is
now
on
a
completely
unsustainable
long-term
trajectory,”
analysts
at
Wolfe
Research
said
in
a
recent
note.
The
firm
worries
that
“bond
vigilantes”
will
go
on
strike
unless
the
U.S.
gets
its
fiscal
house
in
order,
while
rising
interest
costs
crowd
out
spending.

“Our
sense
is
that
policymakers
(on
both
sides
of
the
aisle)
will
be
unwilling
to
address
the
U.S.’s
long-term
fiscal
imbalances
in
a
serious
way
until
the
market
begins
to
push
back
hard
on
this
unsustainable
situation,”
the
Wolfe
analysts
wrote.
“We
believe
that
policymakers
and
the
market
are
most
likely
underestimating
future
projected
net
interest
costs.”

Interest

rate
hikes
from
the
Federal
Reserve
have
complicated
the
debt
situation.
Starting
in
March
2022
through
July
2023,
the
central
bank
took
up
its
short-term
borrowing
rate
11
times,
totaling
5.25
percentage
points,
policy
tightening
that
corresponded
with
a
sharp
rise
in
Treasury
yields.

Net
interest
on
the
debt,
which
totals
government
debt
payments
minus
what
it
gets
from
investment
income,
have
totaled
$516
billion
this
fiscal
year.
That’s
more
than
government
outlays
for
national
defense
or
Medicare
and
about
four
times
as
much
as
it
has
spent
on
education.

The
presidential
election
could
make
some
modest
differences
in
the
fiscal
situation.
Debt
has
soared
under
President
Joe
Biden
and
had
escalated
under
his
Republican
challenger,
former
President
Donald
Trump,
following
the
aggressive
spending
response
to
the
pandemic.

“The
election
could
change
the
medium-term
fiscal
outlook,
though
potentially
less
than
one
might
imagine,”
Goldman
Sachs
economists
Alec
Phillips
and
Tim
Krupa
said
in
a
note.

A
GOP
sweep
could
lead
to
an
extension
of
the
expiring
corporate
tax
cuts
Trump
pushed
through
in
2017
—
corporate
tax
receipts
have
about
doubled
since
then
—
while
a
Democratic
win
might
see
tax
increases,
though
“much
of
this
would
likely
go
toward
new
spending,”
the
Goldman
economists
said.

However,
the
biggest
issue
with
the
budget
is
spending
on
Social
Security
and
Medicare,
and
“under
no
scenario”
regarding
the
election
does
reform
on
either
program
seem
likely,
Goldman
said.