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August 21, 2026. With the country's 250th anniversary, Taylor Swift's wedding, and the World Cup, it is understandable that Americans have been distracted this summer. But signs of economic trouble have been piling up. This week they hit the headlines when the US national debt surpassed $40 trillion, raising concern both nationally and internationally. How did we get here? According to Maya MacGuineas, president of the Committee for a Responsible Federal Budget, the US national debt took nearly 200 years to reach $1 trillion for the first time.
That 1981 milestone was considered a wake-up call. 'Back then, President Reagan told the nation in a televised speech: If as a nation we needed a warning, let that be it.' 'Today we are spending more than that just on interest payments on our debt.' Reaching the $40 trillion figure was anticipated due to increased public spending under the Donald Trump and Joe Biden administrations, but this marks a new milestone. The soaring costs of social programs and other expenditures have outpaced revenues, which have been diminished by tax cuts. Responses to financial crises like 2008 and the covid pandemic have involved increased borrowing. Adding higher interest rates in response to recent inflation spikes, the outlook begins to look bleak.
How serious is it? At the start of Trump's first presidential term in 2016, the US national debt stood at just under $20 trillion. In the decade since, it has doubled. According to the congressional Joint Economic Committee, this figure increases by about $90,000 per second, or $7.8 billion a day. 'What is very different now compared to a decade ago is the level of interest rates,' says Eric Swanson, professor of economics at the University of California and former Federal Reserve economist.
'Long-term interest rates in the United States are at multi-decade highs. Part of that is due to concern about inflation, but also concern about extreme levels of borrowing by the US government.' The bond market is demanding higher yields as investors grow wary of the sheer magnitude of US debt, but also because tech companies borrowing astronomical sums to invest in artificial intelligence are competing with the government for investor capital. 'The more interest rates rise, the more expensive it becomes to finance the deficit,' says economist Mohamed A. El-Erian, a professor at the Wharton School. According to El-Erian, public debt interest payments are now 15% higher than the same period last year. They represent nearly 20% of tax revenues, being 'larger than defense spending,' he adds. Should I be worried? The United States is approaching the $41.1 trillion debt mark, and it is projected to rise to about $64 trillion by 2036, according to the Congressional Budget Office. But the situation is not yet critical, according to economists. The US position as the world's largest economy and the fact that the dollar is the world's reserve currency grant the superpower much greater leeway for fiscal irregularities than other countries, El-Erian states.
'We are reaching a point where it is a flashing yellow light. It is not a flashing red light,' he says. Swanson states that other countries have had similar or even higher debt levels. Although the US national debt stands at 126% of its GDP, it is lower than other G7 countries like Japan and Italy. However, investors' interest in lending money to the US government by buying bonds is 'decreasing,' Swanson warns, creating a vicious circle that forces the government to offer increasingly higher yields to keep investors buying its debt. And rising borrowing costs in the United States inevitably spill over, raising borrowing costs for other countries as well. 'What happens in the United States always crosses borders,' El-Erian says. For example, when Treasury bonds offer higher yields, many investors prefer US assets considered safe. The impact on Latin America could be less foreign investment flowing to countries like Mexico, Brazil, Colombia, Peru, or Chile. Charlie Bean, professor emeritus of economics at the London School of Economics, states that if the US debt-to-economy ratio reaches a certain point, it could trigger a mass sell-off of US bonds and cause major instability in financial markets. 'There is probably a point, but unfortunately we don't know what it is,' he says. 'It's not like there is a fixed figure where we can say, you know, 'if it hits 150% disaster will strike, but we'll be fine if we stay at 145%'.' What does it mean for you? 'Low long-term interest rates are important because they affect mortgages, business financing, and consequently general economic activity,' explains Eiko Sievert, head of public and sovereign ratings at Scope Ratings. According to El-Erian, households are likely to face higher interest rates for mortgages, car loans, and credit cards as a result of the current situation, with lower-income individuals hit hardest.
There is also a secondary effect on consumers, as rising borrowing costs for businesses are usually passed on to them through higher prices. Thus, the impact of debt 'ends up hitting people's pockets one way or another,' MacGuineas says. The latest US figures show the economy slowed in recent months, but is still growing at a considerable pace. This is important because economic growth translates into higher tax revenues, which can fund public spending, whether on government programs or interest payments. With enough growth, the debt problem eases, El-Erian points out. But without sufficient growth, the United States may have to consider other options. These could include reforming the tax system and public spending, or austerity. Debt restructuring is another alternative.
The strategy employed so far has been a sort of financial engineering, where the Treasury intervened on Wednesday to buy back public debt, boosting bond demand and lowering interest rates. But the impact was short-lived, as long-term borrowing costs rose again the following day. With midterm elections approaching, the White House will want to prove it is delivering on economic expectations. Affordability is voters' primary concern. However, the other options are no more attractive, and El-Erian doubts the government is willing to consider other measures. 'I don't see anything happening that will significantly reduce the deficit in the next two or three years. If you look at the political discourse, it's all about tax cuts.'
Author: Michael Race
Source: https://www.bbc.com/mundo/articles/cg5lrejv18yo
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