CNBC: "Rising US debt and deficits raise concerns about economy and markets"

The government debt of the United States, which has increased by almost 50% since the beginning of the Covid-19 pandemic, is causing great concern both on Wall Street and in Washington, writes CNBC.

According to the publication, the federal debt currently stands at $34.5 trillion, $11 trillion above the March 2020 level, equivalent to more than 120% of the United States economy.

"We have large structural deficits and we're going to have to deal with that sooner or later," Federal Reserve Chairman Jerome Powell told bankers in Amsterdam last week, quoted by CNBC. Powell declined to comment further, but encouraged those in the audience to read the Congressional Budget Office's recent reports on the nation's fiscal health.

"Everybody should be reading what's coming out about the US budget deficit and should be very concerned that elected officials need to address this sooner rather than later," the Fed chairman said.

• Uncharted territories for debt and deficits

The figures presented by the Congressional Budget Office outline the likely not gratifying trajectory of the debts and deficits, writes the American media trust. According to the watchdog's estimates, government debt held by the public, which currently totals $27.4 trillion and excludes intra-governmental obligations, will rise from its current level of 99 percent of GDP to 116 percent over the next decade.

"This would be a larger amount than any other in the nation's history," according to the Bureau. Growing budget deficits have led to higher public debt, and the Congressional Budget Office expects the situation to worsen. For this fiscal year, the agency projects a deficit of $1.6 trillion (the deficit is already $855 billion in the first seven months), rising to $2.6 trillion by 2034. As a share of GDP, the deficit will increase from 5.6% this year to 6.1% in ten years. "After the Great Depression, deficits exceeded this level only during and shortly after World War II, during the 2007-2009 financial crisis and the coronavirus pandemic," the Bureau's report states.

In other words, such high deficit levels are especially common during economic downturns rather than periods of relative prosperity, which the U.S. has enjoyed for most of the era since the brief downturn caused by the March 2020 pandemic. On the other side of the Atlantic, European Union member countries are required to keep their deficits at 3% of GDP, writes CNBC.

"America must be aware that it needs to focus a little more on domestic issues related to the fiscal deficit; it's an important thing for the world," said Jamie Dimon, CEO of JPMorgan Chase, in an interview with Sky News last Wednesday. "At some point a problem will arise; why should he expect? The problem is going to be caused by the market, and then you're going to be forced to deal with it probably in a much more uncomfortable way than if you'd dealt with it in the first place," Dimon added.

In a recent opinion piece for the Financial Times, renowned investor Ray Dalio, founder of Bridgewater Associates, expressed his fear that the increase in US debt will make US Treasuries less attractive, "especially to international investors concerned about debt levels the USA and possible sanctions".

At least so far that hasn't been the case - US federal debt held by foreigners stood at $8.1 trillion in March, up 7 percent from a year ago, according to Treasury Department data released last week. US Treasuries, considered risk-free assets, are still seen as attractive places to put cash, but that is likely to change if the United States does not rein in its finances, according to CNBC.

• The impact on the market

The effects of rising bond yields are likely to be felt more quickly in equity markets, according to the US publication. Generally, when yields rise stock prices fall.

"The huge obvious problem is that the US federal debt is now on a completely unsustainable path over the long term," analysts at Wolfe Research said in a note, adding that unless the United States gets its budget in order, the so-called bond vigilantes will make their presence felt, while rising interest costs will dampen spending.

Bond vigilantes are investors who protest a country's perceived inflationary monetary or fiscal policies by selling bonds, thereby driving up yields.

"Our sense is that policymakers (on both sides of the spectrum) will not be willing to address the long-term fiscal imbalances of the United States in a serious way until the market begins to respond strongly to this unsustainable situation. We believe policymakers and the market are most likely underestimating future net interest costs," Wolfe analysts wrote.

From March 2022 to July 2023, the Federal Reserve raised the policy rate eleven times to 5.25-5.5%, which corresponded with a sharp rise in Treasury yields. But, the lifting interest rates by the US central bank has complicated the debt situation, according to CNBC.

Net debt interest, which totals government debt payments minus investment income, totaled $516 billion this fiscal year. The amount is far more than the government spends on defense or Medicare, and about four times more than the United States spends on education.

The presidential election may bring some changes to the fiscal situation, but small ones, given that the debt of the United States increased under President Joe Biden and escalated under former Republican President Donald Trump, as a result of massive spending to support the economy hit by the pandemic.

"The election may change the medium-term fiscal outlook, but less than one might imagine," Goldman Sachs economists Alec Phillips and Tim Krupa wrote in a Sachs note.

According to Goldman, the budget's biggest problem is spending on Social Security and Medicare. However, "in any scenario" regarding the outcome of the elections, the reformation of any of these programs does not seem likely, believe the bank's economists, writes CNBC.