A Growing Problem
The United States government faces a serious and growing debt crisis. With a national debt exceeding $36 trillion, the country is on an unsustainable fiscal path. This situation arises from the government consistently spending more than it earns, relying heavily on borrowing to bridge the gap. This pattern of deficit spending has become deeply entrenched, with the government borrowing trillions of dollars annually.
The situation is particularly alarming considering the current economic climate. Despite low unemployment rates and a robust GDP, the government continues to accrue significant debt. This raises concerns about what will happen to the deficit if unemployment rises or a recession occurs, both of which would negatively impact tax revenues.
A Troubling Start to Fiscal Year 2025
Adding to the concern is the government’s poor start to fiscal year 2025, which began on October 1st, 2024, and runs until September 30th, 2025. In just the first two months, the US has already accumulated a deficit exceeding $624 billion, significantly surpassing the $448 billion deficit recorded during the same period in the previous fiscal year.
This rapid increase in the deficit is driven by a combination of factors. Tax collections have decreased by 7% year-over-year, while government spending has surged by 18%. The increased spending encompasses various areas, including interest payments on existing debt, Social Security, Medicare, Medicaid, the Environmental Protection Agency, the Department of Veterans Affairs, and tax credits.
The government’s ability to address this problem appears limited. Cutting essential programs like Social Security, Medicare, and Medicaid is politically challenging and could have severe consequences for vulnerable populations. Similarly, reducing interest payments on existing debt is not a feasible option.
Who Will Finance the Debt?
A major concern is identifying who will finance this growing debt. When the government needs to borrow money, it issues treasury securities, essentially IOUs. To attract buyers for these securities, the government must offer interest payments.
With a projected $2 trillion overspending this year, the government will need to sell a corresponding amount in treasury securities. Adding to the challenge is the $3 trillion in existing treasuries maturing in 2025, requiring the government to find buyers for a total of $5 trillion in treasuries.
Historically, foreign countries like China have been significant purchasers of US treasuries. However, China has been reducing its holdings in recent years. The European Union’s appetite for US debt is also uncertain, especially given their purchase of approximately $300 billion last year. This raises the question: who will step in to purchase the massive amount of US debt being issued?
The Federal Reserve, responsible for monetary policy, has indicated its reluctance to continue purchasing treasuries. Their involvement could lead to increased inflation, a concern they are trying to avoid. If there are not enough willing buyers, the interest rates on government debt will likely increase to attract investors.
The Risks of Rising Interest Rates
Rising interest rates on government debt could have a ripple effect throughout the economy, leading to higher interest rates on mortgages, car loans, student loans, credit cards, and business loans. This could stifle economic growth and potentially push the country into a recession.
A higher interest rate environment could further exacerbate the government’s financial woes. As the economy weakens, tax revenues would likely decrease, forcing the government to borrow even more money, creating a vicious cycle of increasing debt and economic instability.
The Federal Reserve’s Dilemma
The Federal Reserve faces a difficult choice. On the one hand, they are hesitant to buy more treasuries, fearing it will fuel inflation. On the other hand, they understand the severe consequences of a potential debt crisis.
If the government is unable to find enough buyers for its debt, the Federal Reserve may be forced to intervene. This intervention would likely involve printing more money to purchase treasuries, a move that could lead to a resurgence of inflation.
Looking Ahead
The US debt crisis presents a complex and challenging problem with no easy solutions. The government is caught between a rock and a hard place, facing pressure to reduce spending while also supporting vital programs and avoiding actions that could trigger a recession.
The coming years will be crucial for addressing this issue. Failure to find a sustainable solution could have severe consequences for the US economy and the financial well-being of its citizens.