The long shadows of America’s growing debt

{"text":[[{"start":8.74,"text":"In March, Phillip Swagel, director of the US Congress’s independent fiscal watchdog, told the Financial Times that America risked a Liz Truss-style market shock with its soaring debt pile. "},{"start":19.194000000000003,"text":"His reference to the former British prime minister’s “mini” Budget in September 2022 — which led to a sudden surge in UK government bond yields and ructions across financial markets — was an attempt to fend off complacency, rather than a warning of imminent implosion. "}],[{"start":33.68,"text":"Swagel is right to sound the alarm. "},{"start":36.234,"text":"America’s debt is on an unsustainable path. "},{"start":38.864,"text":"The Congressional Budget Office projects America’s debt-to-GDP ratio will surpass its second world war high of 106 per cent by the end of the decade, and keep rising. "},{"start":48.219,"text":"The total deficit is forecast to average 5.5 per cent of GDP until 2030 — about 2 percentage points higher than the post-1940 mean. "},{"start":57.674,"text":"Net interest payments, which are currently around 3 per cent of GDP, are expected to keep creeping upward too. "}],[{"start":64.34,"text":"Politics is an aggravating factor. "},{"start":66.882,"text":"Both the Democrats and Republicans heed the importance of fiscal responsibility in theory, but neither is prepared to tighten belts, particularly in an election year. "},{"start":75.149,"text":"Joe Biden proposed a $7.3tn budget plan for 2025. "},{"start":80.004,"text":"His presidential rival, Donald Trump, has vowed to renew tax cuts enacted during his time in the White House, which could add another $5tn to the nation’s debt, according to the Committee for a Responsible Federal Budget, a think-tank. "}],[{"start":93.74000000000001,"text":"America’s growing debt puts upward pressure on its longer-term borrowing costs. "},{"start":98.35700000000001,"text":"Lax fiscal policy can raise inflation expectations and the perceived risk of holding debt for long periods. "},{"start":104.174,"text":"The hefty pipeline of debt issuance will also need to be absorbed by more price-sensitive investors, with the Fed now engaging in quantitative tightening. "}],[{"start":null,"text":"

"}],[{"start":112.97000000000001,"text":"Elevated yields raise the cost of borrowing and could undermine economic growth. "},{"start":117.34900000000002,"text":"There is an increased vulnerability to rapid and disruptive movements in US bond markets. "},{"start":122.09200000000001,"text":"This has knock-on effects for credit and financial stability abroad too, since US Treasuries act as a benchmark for pricing debt globally. "},{"start":129.359,"text":"IMF research suggests that a 1 percentage point spike in US rates led to a 90 basis point rise in other advanced economies’ bond yields, and an increase in emerging markets of 1 percentage point. "},{"start":140.264,"text":"Restraints on domestic and global growth will only heighten the debt reduction challenge. "}],[{"start":145.67000000000002,"text":"America’s economic heft gives it substantial leeway. "},{"start":149.12400000000002,"text":"The dollar’s role as the international reserve currency means demand for US debt is ever-present, and AI-driven productivity growth could indeed help lessen its debt problems. "},{"start":158.02900000000002,"text":"But the country’s global influence may foster a dangerous complacency among its politicians. "},{"start":162.972,"text":"Ignoring the difficult tax and spending decisions needed to put debt on a more sustainable footing keeps the economy on a risky path amid political and economic uncertainty. "}],[{"start":172.53000000000003,"text":"For instance, another Trump presidency would come with significant unknowns. "},{"start":176.93400000000003,"text":"Reports that his team is drawing up proposals to water down the Fed’s independence are deeply worrying for inflation control. "},{"start":183.27700000000004,"text":"A well-behaved bond market hinges on clarity and confidence in government policy — as Truss could attest. "},{"start":188.94400000000002,"text":"Rising geopolitical instability and risks in financial markets, from private capital to liquidity problems in Treasury markets, are also exposures. "},{"start":197.11200000000002,"text":"Shocks could damp growth and drive harmful spikes in yields, making debt dynamics even worse. "}],[{"start":203.23000000000002,"text":"Sooner or later policymakers need to engage in bipartisan efforts to think seriously about how America funds itself responsibly. "},{"start":210.584,"text":"If not, panicked bond traders may force them to. "},{"start":213.889,"text":"As the IMF chief economist, Pierre-Olivier Gourinchas, said last month: “Something will have to give. ”"}],[{"start":219.95000000000002,"text":""}]],"url":"https://creatives.ftacademy.cn/album/153679-1715126773.mp3"}