America’s ‘Debt Spiral’ Is Nearing a Critical Threshold

The US government has a serious spending problem. It's thrown money at military needs, roads digging out of the pandemic, mostly using cash it doesn't have in the bank. Just like the rest of us paying off a loan, the government has to pay interest on what it borrows. Over

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So the US has really leaned into debt, so much so that the last time the country has zero debt was in eighteen thirty five. That's because each year the US creates a massive budget. It's money that keeps the economy moving, even when faced with challenges like a once in a lifetime pandemic. But when the federal government wants to spend more than it's bringing in through taxes and other revenue, it has to borrow from other countries and

Good think about it for your household. If everything I owe is bigger than the assets I have. I'm in a deficit.

My colleague Liz McCormick and I have spent a lot of time talking about the deficit. She's a chief correspondent at Bloomberg covering debt and currency markets.

So for the US, all the net revenues they're taking in after they pay out all their expenses, they're in the red.

Unlike a household spending more than it's bringing in. It's okay for the US government to live its life in the red.

We have the global what they call reserve currency, meaning many things are priced in US dollars. It gives us this kind of special status. No one quite thinks the US is going to kind of really default.

On their data.

In other words, people trust that the US will pay back its loans eventually, and they trust so deeply that it's good for its dollar that they rely on it as the backbone of the global economy. That's one reason why America can run up such a high bill. But lenders still want something in exchange for buying US debt.

There's no free lunch, so they're saying, yeah, hear, US Treasury take our money. We like you take it, but give me something every month because I'm kind of putting my money to you and I can't use it right, so please give me some what we call interests.

So when the government wants to fund a program, say a new part for medicare, building a bridge, or helping allies like Israel or Ukraine, even if we don't have that money set aside, we can borrow it at a very low cost to taxpayers. That's helped get out of some really sticky situations. You may recall what newscasters and headlines sounded like during the financial crisis.

Three of the five biggest independent firms on Wall Street have now disappeared.

Wherey investors now wonder how the markets will recover from billions of dollars of bad mortgage debts, frozen credit markets, banks afraid to lend.

We are in the midst of a serious financial crisis.

That last clip was President George W. Bush speaking in two thousand and eight, when the government used spending to prop up a flailing economy, but that came with a price tag of hundreds of billions of dollars. The federal deficit nearly tripled from what it had been before the crisis.

Now every family knows a little credit card debt is manageable.

That's President Barack Obama speaking in twenty eleven.

But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers. In a country that can't balance its books, interest rates could climb for everyone who borrows money.

In twenty thirteen, US debts are passed the country's GDP. When President Donald Trump took office, he worked with Congress to cut taxes as a way to help grow the economy. Those tax cuts will add an estimated two and a half trillion dollars to the nation's deficit in the next decade or so. And then COVID hit and lawmakers were desperate to keep the economy afloat.

First, those stimulus checks up to fourteen hundred dollars for about ninety percent of households.

Were making sure that small businesses have access to loans for their fixed.

Costs, and expanded unemployment insurance.

During the pandemic, even as are borrowing shot up as it kind of should in a crisis. We didn't want, you know, companies and people to personally fail and not be able to fund their life, so there was a lot of fiscal support. The FED was cutting rates down to zero.

Let's recap to keep the economy from creatoring the government's spent. And then the Federal Reserve said, let's make it really easy for people to borrow even more so that they keep spending. So the FED slashed interest rates, making it cheaper to take on debt.

But that's all been turned on its head now because because of inflation, the Fed has had to lift rates to like a twenty two year high.

That twenty two year high is a shock to the economy right now. People and companies have gotten so used to low interest rates that now everyone's adjusting to how much more they have to pay for everything from car loans to mortgages. And higher rates are hurting the governments while at too.

And that's made the Treasury, every time they pay interest semiannually, pay a lot higher interests. I mean, our interest expense is almost the amount of you know what we're paying for big other categories like defense.

In twenty twenty three, the cost of just paying off. The interest on US debt reached a trillion dollars coming up. As the US debt continues to climb, what's the growing cost to taxpayers? The US debt has been climbing for decades, but to understand why experts think now is different, I wanted to talk to someone who's seen how the budget is handled from the inside. So I sat down with Philip Swagel. He's the director of the Congressional Budget Office

We provide the Congress with budget analysis and economic analysis. We would never say to a member of Congress, your bill is the right thing or the wrong thing. We just provide analysis.

If you're following news coverage of a proposed law, you've probably heard CBO's estimate for how much that legislation will affect the national debt.

The Congressional Budget Office released their ten year baseline for farm bill spending. The Congressional Budget Office estimates these changes could cost more than ninety billion dollars over the next two years.

Swegel told me that there are two main reasons we should care that the government can't get its debt under control. First, it means that we have to spend money paying off interest, as in managing the debt load, instead of using that money for programs that actually help people. And second, it's only going to get worse when.

We have higher interest rates, more debt, we pay more in interest, and then that builds back into the debt, which leads to yet higher debt and higher interest payments.

So it's a spiral.

We are in a spiral. Now, it's a slow spiral, but it's still a spiral of rising debt and rising payments on the debt. The situation is unsustainable.

Just this week, Nassim Nicholas Teleb, a former option strader who wrote a book about unpredictable events called The Black swam On, told a hedge fund that he advises that a debt spiral is like a death spiral. He's not the only one with eyes on the economy who's been raising alarm bells. A few weeks ago, Robert Rubin, the former Treasury secretary, put it bluntly on Bloomberg TV. No, I think we're in a terrible place. And this is all while the US has had some of the cheapest

I don't want to be too pessimistic, but I just don't see the political will down in Washington right now to change their tune. We can't seem to work across the aisle and get these agreements that would work to put us at least on a trajectory where the deficit should be getting better.

Right Even passing a basic spending bill has turned into a high wire act, haunted by regular government shutdown threats, So getting through any serious cuts is going to be hard.

The challenge is that at any moment, we don't have to take action, right.

So it's hard to imagine folks in governments suddenly getting inspired to take action. But there is at least one example of a time when it got its act together. Swegel says that back in the nineties, people thought that the US might fully pay off its debt, and they were worried about that.

And that's because of the privileged place of treasury securities. The treasury debt has an important role in the global economy. A treasury bond is an asset for the private sector that is seen as safe and seen as liquid, and so if investors want an asset with those characteristics, the ability to buy and sell treasury bonds is important to financial markets.

That fiscal responsibility didn't happen by accident. It essentially took investors bullying President Bill Clinton's administration. Here's how that went. Investors were against the government's unsustainable spending, so they revolted. They started dumping their treasury bonds, and when those bonds flooded the market, they appeared a whole lot riskier. It was your basic laws of supply and demand at play.

Back in the Clinton days, you know, James Carville, his advisor, always joked, like, I thought I'd want to come back as what do you say, like a great baseball player or the pope or something. And then he's like, I want to come back as the bond market. Because Clinton wanted to do all the spending and bond yields just one crazy.

Clinton was forced to change his whole economic agenda just to keep investors happy and prevent an economic crisis. Back in the nineties, debt interest wasn't skyrocketing like it is today, so it's a bit of an Apple's to Walnuts comparison. But it's possible that the same kind of pressure from markets could help.

Now. Maybe if bon Yeals just keep going and going in this situation gets worse and worse, maybe somebody gets religion and says we need to do something. But I think it's going to take a lot.

Thanks for listening to The Big Take DC podcast from Bloomberg News. I'm Salaia Mosen. This episode was produced by Julia Press and Naomi Shaven. It was fact checked by Stacy Rede. Alex Sugia and Blake Maples are mix engineers. Our story editors are Caitlin Kenny, Wendy Benjaminson, and Michael Shephard. Nicole Beemsterbower is our executive producer. Sage Bauman is our head of podcasts. If you like what you heard, please be sure to subscribe, rate, and review the show. It'll