WASHINGTON – America’s total national debt exceeded $31 trillion for the first time on Tuesday, a dismal financial event that arrived as the country’s long-term financial picture turned bleak amid rising interest rates.
The breach of the floor, revealed in a Treasury report, comes at an inopportune moment, as historically low interest rates are being replaced by higher borrowing costs as the Federal Reserve attempts to combat rapid inflation. While some policymakers have viewed record levels of government borrowing to combat the pandemic and to fund tax cuts as affordable, these higher rates are making America’s debt more expensive over time.
Michael A. said: Peterson, CEO of Peter G. Foundation, which promotes deficit reduction. “A lot of people were satisfied with the course of our debt, in part because the rates were so low.”
The new numbers come at a volatile economic moment, as investors cycle between fears of a global recession and optimism that no one can be avoided. On Tuesday, markets rose nearly 3 percent, extending gains from Monday and setting Wall Street on a more positive path after a violent September. The rally came in part from a government report that Showing signs of some slowdown in the labor market. Investors took that as a sign that the Fed’s interest rate increases, which have raised corporate borrowing costs, may begin to slow soon.
Higher rates could add an additional $1 trillion to what the federal government spends on interest payments this decade, according to Peterson Foundation estimates. This is on top of the record debt costs of $8.1 trillion that the Congressional Budget Office projected in May. Expenditures on interest could exceed what the United States spends on national defense by 2029, if interest rates on public debt rise to only one percentage point higher than what the CBO has estimated over the next few years.
The Federal Reserve, which has cut rates to nearly zero during the pandemic, Since then I started raising them To try to tame the fastest inflation in 40 years. Prices are now set in a range of 3 to 3.25 per cent, and the latest forecast saw the central bank rise to 4.6 per cent by the end of next year – up from 3.8 per cent in a previous forecast.
Federal debt is not the same as a 30-year mortgage that is paid off at a fixed interest rate. The government is constantly issuing new debt, which effectively means higher and lower borrowing costs along with interest rates.
The CBO warned On America’s mounting debt burden in a report released earlier this year, saying investors may lose faith in the government’s ability to repay its debts. The budget office said these concerns could cause “a sudden increase in interest rates and a spiral of inflation”.
Interest rate increases can interrupt a brief period of improvement in the country’s financial picture as it relates to the economy as a whole. Both the Central Bank of Oman and the White House predicted that the national debt, measured as a share of the size of the economy, would shrink slightly over the next fiscal year before growing again in 2024. This is because the economy is expected to grow faster than debt.
The $31 trillion threshold also poses a political problem for President Biden, who has vowed to put the United States on a more sustainable fiscal path and Reduce the federal budget deficit By $1 trillion over a decade. A deficit occurs when the government spends more money than it receives in tax revenue.
The Committee on Responsible Federal Budget appreciates that Mr. Biden’s policies have He added nearly 5 trillion dollars to disability since taking office. That forecast includes Biden’s $1.9 trillion economic stimulus bill, a variety of new spending initiatives approved by Congress and a student loan debt forgiveness plan. It is expected to cost taxpayers nearly $400 billion over 30 years.
White House budget officials estimated in August The deficit will be just over $1 trillion for fiscal 2022, which is about $400 billion less than they originally forecast. Biden says these numbers are the product of his policies to stoke economic growth, such as the US bailout.
“We cut the deficit by $350 billion in the first year and nearly $1.5 trillion this year,” Biden said at a meeting of the Democratic National Committee in Washington last month.
These numbers mask the effects of the bailout, which was funded entirely with borrowed money. Much of the deficit cut that Mr. Biden is championing reflects the fact that he and former President Donald J. Trump signed bills that borrowed heavily in order to mitigate the damage of the pandemic recession. The deficit has fallen in large part because policymakers haven’t made it through another big round of epidemic-fighting aid this year.
Biden’s Budget Office now expects the deficit to rise higher than previously forecast over the next three years, largely due to higher interest costs as a result of higher interest rates. In recent weeks, borrowing costs have risen higher than the White House had anticipated, suggesting officials will need to revise their deficit forecasts again.
“I don’t know where interest rates are going, but no matter what you thought a year ago, you definitely have to check that,” said Jason Furman, an economist at Harvard University and a former chief economic aide to President Barack Obama.
“The deficit trajectory is almost certain to be very high,” Furman added, given the rise in interest rates in recent weeks. “We were kind of on the edge of ‘okay’ before, and we’re past ‘okay’ now.”
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In recent weeks, administration officials have walked a fine line about the deficit. They have advocated deficit-cutting moves — such as the Climate, Healthcare and Tax Act that Biden signed into law in August — as a necessary complement to the Fed’s efforts to lower inflation by raising interest rates. They said Biden would be happy to sign further deficit cuts into the law, in the form of tax increases for high earners and large corporations.
But officials also say they are comfortable with the administration’s debt and deficit levels and do not see the nation as close to any financial crisis. They say inflation-adjusted government interest costs – their preferred measure of debt burden – remain historically low as a share of the economy. They say it would be wrong for Biden to shift fiscal priorities in response to higher interest rates.
“Our budgets have been very fiscally responsible, and they build a very compelling structure toward significant investments and fiscal responsibility,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview. “So it would be a mistake to get too busy in reaction to current events.”
Senior administration officials have said since Mr. Biden took office that the extravagant investment plans were fiscally responsible because interest rates were too low. At her confirmation hearing last year, Treasury Secretary Janet L. Yellen cited low borrowing costs as justification for ambitious spending proposals and stimulus measures.
“Neither the president-elect, nor I, are proposing this relief package without appreciating the country’s debt burden,” said Ms Yellen. “But right now, with interest rates at historically low levels, the smartest thing we can do is act big.”
Critics of the Biden administration’s spending initiatives have warned that relying on low interest rates to justify expansionary policies could bite back into the US economy, as the debt burden grows.
Brian Riddell, a senior fellow at the Manhattan Institute, said the US was unwise to offer long-term debt obligations based on short-term, adjustable interest rates. He said adding new debt with higher interest rates would fuel the financial fire.
“Essentially, Washington has been engaged in a long-term debt spree and has been fortunate to have been rescued by low interest rates up until this point,” Riddell said. “But the Treasury has never locked in those low rates in the long run, and now high rates may collide with that surging debt with expensive consequences.”
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