There is fear of a future ‘collapse’ like the one that brought down the United Kingdom government

In the midst of an era of high interest rates, the US has entrusted itself to a maelstrom of debt to bridge its deficit. The recent data released by an unleashed treasury emissions market have set off alarm bells among experts, analysts and institutions. The latest to charge against this situation has been the ‘watchdog’ of Congress. The nonpartisan House Budget Office (CBO) has signaled that it fears in the coming years a ‘collapse’ like the one that occurred with the pound in 2022 after announcing its economic plan, due to “the unprecedented trajectory of the tax burden.”

Phillip Swagel, director of the organization, explained that, although the US had not yet reached this point, it could happen in the next five years. The expert defended in statements to Financial Times that the pace of indebtedness is here to stay. According to the latest official data, the North American country already has 34.58 trillion dollars of public debt and This already represents 124% of the GDP. This figure, mixed with the rise in interest rates, has led to The North American nation has already paid more than a trillion dollars in interest aloneThat is, it spends more on this item alone than on its Defense budget. With these figures “the danger that the US is approaching is the same one that the United Kingdom faced with its former Prime Minister Liz Truss, where in the face of a political decision there was a powerful reaction from the markets,” explained Swagel.

In any case, the latest CBO report pointed out that only the US federal debt (discounting the rest of the administrations It represented close to 97% of GDP. According to the agency. In that sense, although the general debt on its economy is already at historic highs, the federal debt will exceed 107% before the end of the decade, that is, the maximums that had been recorded in the Second World War, when the need to win at Any cost led the Government to a 30% deficit to finance its military muscle.

Regarding the deficit, the forecasts are for it to go ‘in crescendo’ continuously up to 8.65% from the current 6.3%. These figures contrast sharply with an average deficit of 2.2% in the last 30 years and 1.6% in the last 50. “That growth is the result of rising interest costs and large and sustained primary deficits, which exclude net interest outlays.”

Since Covid, the country has embarked on one of the largest deficits in its history. First of all, the fight against the pandemic and the drop in activity For this reason, it was the key to understanding this trend. Later, althoughand exceptional spending has been diluted The deficit has not receded, since the Government has had to assume extra spending programs such as the banking rescue after the collapse of some regional banks with Silicon Valley Bank at the helm and other more permanent bills such as Social Security or Medical Care They have been advancing.

Brookings experts point out that this extra expense only explains why the skyrocketed deficit and that last year there were already worrying symptoms that had been covered up with extraordinary income. “The decrease in income has been the key to everything since last year it reached 19.4% of GDP compared to its historical average (16.3%).” Revenue in 2023 returned to its historical average while “expenses only increased by 0.3%,” explains Louise Sheiner, an analyst at the firm.

The Trump factor

From CBO they point to Trump’s first arrival at the White House as the key factor to explain the greater US debt for finance tax cuts which was undertaken in 2017 and the subsequent economic stimulus of 2020, with the arrival of covid. In that sense, Swagel points out that if the Republican candidate reached the White House this would be settled, probably with an injection of another 5 trillion extra dollars into Federal debt between 2026 and 2035, due to the return of these tax cuts. However, in a previous report they show that this trend of greater deficit and debt would not stop in other scenarios either.

“Increases in net interest costs and spending on major health care programs will be the biggest protagonists of the increase in spending during the period 2024-2054,” explain CBO experts, who believe that health care programs will ‘eat’ 8.3% of GDP. While these two fronts are established as the main source of expenses, income from taxes (discounting Trump’s cuts) will barely grow, remaining at 18.7% of GDP with an increase of 1.3 percentage points. In that sense, experts expect a growth of 1.7% of Real GDP (discounting inflation).

James McBride, CFR analyst, points out that “although the US has had deficits almost every year since the birth of the nation”, something would have changed in recent years. The reality is that “the payment of interest will be the key factor to explain the increase in debt, since we believe that this item alone will be equivalent to 7.5% of GDP. In addition to the aforementioned increase in spending on social security, they agree that health care will be key “because the US population ages without a corresponding increase in income.”

“We probably need to see some kind of crisis in the world’s largest bond market, for politics to come to its senses”

Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable AM, explains that “what the CBO foresees (on debt) is an unsustainable situation” given that “one would expect that at some point the ruling parties come together to face the situation“. The expert indicates that “what seems most likely is that at some point in the coming years market forces will force Congress to address the situation and put public finances back on a sustainable path.”

The analyst emphasizes this possible paradigm shift, pointing out that it would have to do with a traumatic event that causes the trend proposed by the CBO to break. “we probably need to see some kind of crisis in the largest market of the world’s bonds, and a centerpiece of the financial markets, to make the American ruling class see reason. However, calculating the moment when it will occur is almost impossible.”

There is no change in trend

However, at the moment this trend not only does not seem to change, but emissions continue to reach absolute records. After the supply of public debt by the US reached $23 trillion in 2023, an absolute record compared to the 2020 figures, when 20.95 trillion were issued, 2024 It has also started with a record. In just the first two months, emissions have already skyrocketed by 54% to nearly $5.16 trillion compared to $3.35 trillion last year.

The trend is even more striking when looking at annual levels since the treasury bond market is already 60% larger than at the end of 2019, when barely $12 trillion in public debt was issued. In net terms, emissions also They have grown 54% in just two months. These figures have worried experts, since in 2023 the difference between emissions and withdrawals was 2 trillion dollars. This is the amount that has been needed to cover a deficit of 1.7 trillion dollars.

“There is a huge lack of political will to raise revenues (with tax increases) or cut spending” to end the debt trend, according to CFR. In that sense “This enormous load can become a burden and a debt spiral is generated, a fiscal crisis that ends a painful situation (through spending cuts to sudden tax increases).

Rob Hawoth, director of strategy at US Bank, explains this loop that the US is entering given that “more interest is now being paid, which requires more debt issuance.” A trend that engenders clear risks given that “if the supply of Treasury securities continues to grow to finance public debt, there is a risk that it could exert upward pressure on interest rates” and, ultimately, “has the potential to slow corporate borrowing activity and may be detrimental to business activity and economic growth.”

“It is the most predictable crisis the US has ever faced”

Jamie Dimon, CEO of JP Morgan, spoke about this problem after releasing his own debt estimates and described its growth like “a hockey stick.” According to the senior official, the United States faces “a precipice, which will be reached in about 10 years” when the federal debt will be around 130%. The president of Bank of America, Brian Monyihan, added on the Teneo Insights podcast that “it is the most predictable crisis the US has ever faced and we have to pay attention to debt levels now.”

This trend has already been felt in debt rating agencies. In that sense Fitch unexpectedly lowered the rating this summer triple A up to AA+ in an unprecedented decision. The main reason he gave at that time was how the government’s debt load was putting its economy at risk. “Higher interest rates and rising debt volumes will increase the interest burden as the population ages” and other types of public costs such as “health care” grow.