A Wall of Debt Ahead for the US Economy

Having a lot of debt isn’t unusual for an economy. Some might say, a big debt burden just reflects the cost of doing business… as a nation. America is no exception here, as the total debt for the United States sits at roughly $34 trillion. That’s trillion with a ‘T’.

To put this in perspective, the ratio between the total debt held by the public and U.S. GDP — the broadest measure of economic activity — stood at a staggering 97% last year. Over the next ten years, this percentage is expected to grow to 116%, according to estimates by the Congressional Budget Office, higher than during World War II. Treasury Secretary Janet Yellen has called for deficit reductions.

The Danger of Debt

So what does this mean?

Economies with too much debt can become dysfunctional. Examples of recent history include Greece and Portugal during the European debt crisis, as well as Argentina and, perhaps most prominently, Venezuela.

Worries that the U.S. might not be able to pay back its debtors are limited, not least, because the U.S. Treasury market is the most liquid financial market in the world.

Even so, policymakers have acknowledged the issue of rising debt. And so have credit rating agencies, which have downgraded America’s credit ratings.

Interest Rates at the Center

All this is leading us back to talk about interest rates, as they also make it more expensive for the government to borrow. Treasury yields are a way investors express future rate expectations, meaning that if the market expects rates to be lower, yields should follow suit.

The Federal Reserve has raised rates to combat inflation, and even though central bankers tell us that rate cuts are near, the 10-year Treasury yield has recently bounced higher. That said, demand for Treasuries is also very much there, not least because rates are higher, but also because the Treasury market is a safe haven during times of geopolitical trouble.

So while it’s wise to keep an eye on America’s growing debt burden, there’s no immediate crisis ahead.

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