Out-of-control U.S. national debt could send markets lower and wreak havoc on economy: watchdogs

Down Angle Symbol A symbol in the form of an angle pointing downwards. Interest payments cost the government more. Getty Images

• The exploding national debt threatens to lead to market chaos and economic problems, two supervisory authorities have warned.
• The US government's skyrocketing interest payments are eating a hole in its budget, it was said.
• Investors have dismissed the threat but there is a risk of a collapse in the UK market.

The U.S. government is piling up dangerous levels of debt, raising the risk of a market collapse and economic catastrophe, two financial watchdogs have warned.

“We're on track for record spending, record deficits, record debt, record interest payments – the list goes on,” Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, told Fox Business this week.

“We are on a terrible path when it comes to our household finances,” she added.

MacGuineas compared the government's cavalier spending policy before interest rates rose to a consumer taking advantage of a teaser rate on a credit card and then being surprised by a rate rise.

Big tax cuts, massive government stimulus during and after the pandemic, and a sharp rise in interest rates have helped the national debt more than double in the last 15 years, from under $17 trillion in 2009 to well over $34 trillion U.S. dollar.

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

Market chaos and economic problems

The CBO's director, Philip Swagel, told the Financial Times that investors could get scared at some point.

“The danger, of course, is that the UK faced former Prime Minister Truss when policymakers tried to take action and then there was a market reaction to that action,” he said.

Swagel was referring to the previous British government's plan to make unfunded tax cuts, which raised fears of faster inflation, higher interest rates, budget problems and a recession.

The panic drove the British pound to a record low against the dollar, pushed British government bonds to their highest level since the financial crisis and caused a liquidity crisis in the pension industry.

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

While there is no immediate risk of such chaos for the U.S., bond markets could “bounce back” if government interest payments rise to $1 trillion in 2026 as expected, Swagel said.

The latest CBO report warned that rising U.S. debt would drive up the government's interest payments to foreign holders of Treasury bonds and put pressure on public spending and economic growth.

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

Worries 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 in some sort of bubble environment, which is the national debt,” MacGuineas said, warning that the positive sentiment “could suddenly change.”

But she noted that some Wall Street experts were “incredibly concerned” about the national debt and interest payments.

An example is Jim Rogers, George Soros' former business partner. He argued that rising U.S. debt was laying the groundwork for the worst financial disaster of his lifetime.

Jeffrey Gundlach, CEO of DoubleLine Capital, also sounded the alarm about debt repayment. He warned that they could eat up more and more of the federal budget, leaving not enough money to fund everything from the military to Social Security to Medicare.