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- The government's rapidly increasing debt levels are causing problems for the US economy.
- These include higher inflation, greater market volatility and a lower quality of life for Americans.
- A slowdown in borrowing is critical going forward, economists told Business Insider.
The USA is sitting on the largest pile of national debt in its history and economists are getting nervous about it.
The federal debt balance reached $34 trillion this year, and the government is on track to rack up another $1 trillion in debt every 100 days, according to a Bank of America estimate.
Why is this so worrying?
The mountain of debt is a breeding ground for economic problems, including higher inflation, lower quality of life and – in the worst case – destabilization of the entire financial system, according to Les Rubin, a market veteran who has called for the US debt situation to be one of the “biggest Ponzi schemes” in the world World.
It is critical for the US to sell its debt to investors, which include institutions, individuals and other countries. But higher debt levels raise doubts about whether the U.S. will be able to keep its promises to continue paying down debt, and the more people hesitate to buy U.S. debt, the more the economy will be damaged, Rubin says.
The U.S. Treasury sold $22 trillion in Treasuries last year, but U.S. Treasury auctions have seen weak demand recently, suggesting investors may soon have trouble capping the huge to cope with the rush of new bond issues.
Recent auctions of 10- and 30-year bonds have been met with little enthusiasm as investors expect higher interest rates for a longer period of time and persistent inflation. The US will re-enter the market in May by selling $385 billion in new bonds.
“What would happen if we couldn't sell the debt is that we would end up unable to function as an economy. The government survives on debt. “If we literally couldn’t sell our debt, we wouldn’t be able to pay our bills,” Rubin told Business Insider in an interview.
Debt itself is inherently inflationary, meaning consumers can expect higher prices if the government doesn't curb their borrowing.
That's because debt provides a measure of economic stimulus that accelerates hiring and wage growth. If the economy is already at full employment, that also means higher inflation, according to Jay Zagorsky, an economist at Boston University.
Inflation has been at least a full percentage point above the Fed's 2 percent target for the past two years. Prices rose 3.5% annually in March and inflation was higher than expected for the third month in a row.
A smaller budget
Higher debt could also lead to a poorer quality of life for Americans, Zagorsky added. Because the more debt grows, the more interest the government has to pay to service the debt – and the less money the US has to spend on other priorities like Social Security and other important parts of the social safety net.
According to the Treasury Department, the U.S. spent $429 billion on interest payments alone last year. That's 240% of what the government spent on transport, trade and housing combined.
“Soon, one of the most important things the federal government will spend money on will no longer be defense, will not be education. It will not be for housing, but for interest rates,” Zagorsky said.
Economic consequences
If investors largely lose confidence in U.S. government debt as a safe haven, it would lead to turmoil in financial markets, Rubin warned, due to the sheer volume of U.S. debt held by institutions worldwide.
In a worst-case scenario, he expects markets to collapse if debts become too high and people believe the U.S. can't pay it back.
“Trillions of dollars sitting on balance sheets around the world will significantly lose value or become worthless. Interest payments could be reduced. This would be a devastating blow to the global economy, ultimately leading to chaos. We can’t do that. “Let it get there,” he said.
There is little the government can do to prevent these problems from brewing, other than to stop taking on so much new debt, Zagorsky and Rubin say. Technically, the government could print money to pay its dues, but that would lead to hyperinflation as the money supply would skyrocket.
Robust economic growth can make debt more sustainable, but debt is growing much faster than the economy – national debt has risen 86% over the last decade while GDP grew 63%, according to Fed data.
Economists are unsure when exactly the national debt will become a real problem for the USA. Unless the pace of borrowing slows, Rubin expects some kind of crisis to occur within the next decade.
“It starts slowly and then accelerates quickly. At the moment I don't think anything is imminent. I would say we have ten years or less to fix this problem. I think that might be the optimistic scenario,” Rubin said.
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