Runaway government debt could sink markets and slam the economy, 2 watchdogs warn

Runaway government debt could sink markets and slam the economy, 2 watchdogs warn
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Interest payments are costing the government more.

  • The soaring national debt threatens to cause market chaos and economic pain, two watchdogs warned.
  • The US government’s ballooning interest payments are eating a hole in its budget, they said.
  • Investors have brushed off the threat but there’s a risk of a UK-style market meltdown.

The US government is racking up dangerous amounts of debt, raising the risk of a market meltdown and economic disaster, two fiscal watchdogs warned.

“We are headed toward record spending levels, record deficit levels, record debt levels, record interest payments — the list goes and on,” Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, told Fox Business this week.

“We are on a terrible trajectory in terms of our fiscal finances,” she added.

MacGuineas compared the government’s carefree spending before interest rates leaped to a consumer taking advantage of a teaser rate on a credit card and then getting caught out when it jumps.

Major tax cuts, massive amounts of government stimulus during and after the pandemic, and a sharp rise in rates have helped to more than double the national debt within the past 15 years, from under $17 trillion in 2009 to well over $34 trillion.

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In a report this month, the Congressional Budget Office predicted the debt would rise from 97% of GDP at the end of last year to 166% by 2054.

Market chaos and economic pain

The CBO’s director, Philip Swagel, told the Financial Times that investors might get spooked at some point.

“The danger, of course, is what the UK faced with former prime minister Truss, where policymakers tried to take an action, and then there’s a market reaction to that action,” he said.

Swagel was referring to the previous UK government’s plan to make unfunded tax cuts, which sparked fears of faster inflation, steeper interest rates, budgetary woes, and a recession.

The panic drove the British pound to a record low against the dollar, pushed UK government bonds to their highest levels since the financial crisis, and caused a cash crunch in the pensions industry.

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The Bank of England calmed nerves with an emergency bond-buying program, and Liz Truss resigned after just 45 days as prime minister.

While the US isn’t at imminent risk of that kind of chaos, bond markets could “snap back” if the government’s interest payments soar to $1 trillion in 2026 as expected, Swagel said.

The recent CBO report warned that spiraling US debt would ramp up the government’s interest payments to foreign holders of Treasurys, and put the squeeze on public spending and economic growth.

The watchdog also flagged inflation, dollar weakness, and a global financial crisis as debt risks. It noted that banks, insurers, and other financial institutions could be overwhelmed by sudden losses in their bond portfolios, and fail.

Worry on Wall Street

Despite the potential dangers, investors have pushed assets like stocks, gold, and bitcoin to record highs this year.

“Markets tend not to worry when things are still kind of in a bubble environment, which is what the government debt is,” MacGuineas said, warning the positive sentiment could “turn on a dime.”

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However, she noted that some experts on Wall Street were “incredibly worried” about the national debt and interest payments.

One example is Jim Rogers, George Soros’ former business partner. He’s argued that mushrooming US debt is laying the groundwork for the worst financial disaster in his lifetime.

DoubleLine Capital CEO Jeffrey Gundlach has also sounded the alarm on debt payments. He warned they could eat up more and more of the government’s budget, leaving it short of the cash needed to fund everything from the military to social security and Medicare.

Read the original article on Business Insider

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