Catastrophic financial implosion lurks for the U.S., potentially engulfing the entire economic infrastructure
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In recent times, the US has seen a surge in its budget deficit, with the "One Big Beautiful Bill" adding an estimated $4.1 to $5 trillion to budget deficits over the next decade. This escalating deficit is projected to push the federal debt to about 127-129% of GDP by 2034, according to the Congressional Budget Office (CBO) [1][2].
The rising debt burden has several consequences. For one, it tends to push up interest rates across the economy, potentially slowing economic growth, increasing inflationary pressures, and imposing heavier debt servicing costs [3]. The CBO projects that the recent bill will significantly raise federal debt held by the public, which may lead to an oversupply of bonds, causing bond prices to fall and yields (interest rates) to rise [3].
Higher interest rates increase borrowing costs for consumers and companies, which may depress economic activity and investment, thus dampening economic growth [3]. Moreover, increased debt entails greater government spending on interest payments (debt service), crowding out resources otherwise usable for productive investments or social programs.
Elevated debt and deficits may also create uncertainty about fiscal sustainability, causing investors to demand higher risk premia on US assets including corporate bonds and stocks, possibly raising the cost of capital beyond just government borrowing [5].
Inflation impacts are more nuanced: while deficits financed by borrowing do not automatically cause inflation, persistent large deficits amid already elevated inflation and economic constraints can exacerbate inflationary pressures. Additionally, slower economic growth and higher interest expenses reduce the resources available for future investments, potentially burdening subsequent generations with higher taxes, reduced public services, or greater economic stagnation [4][5].
The Japanese government debt, which stands at 250% of their GDP, offers a cautionary tale. A small increase in interest rates in Japan has a devastating effect on government finances [6]. As government spending increases, the less productive public sector absorbs more labor and resources, starving the more productive private sector of critical inputs [7].
The consequences of the federal deficits may fall on future generations, not the current one. In the political sphere, GOP lawmakers are warned that slashing spending on Medicaid and food assistance could cost them seats in the mid-terms, as reducing spending on medical care for those in need could be detrimental to the Republican party in the mid-terms [8][9].
Moreover, the emigration of over 500,000 people due to Donald Trump's aggressive deportation campaign could shrink the US's GDP, further exacerbating the economic challenges posed by large-scale budget deficits [10].
In the face of these challenges, it is crucial to manage deficits to maintain sustainable growth and intergenerational equity. As Charles Maurice de Talleyrand-Peigord once said, "an error is different from a crime." However, it is essential to learn from these errors to ensure a prosperous future for all.
References:
[1] "CBO's 2022 Long-Term Budget Outlook," Congressional Budget Office, 2022. [Online]. Available: https://www.cbo.gov/publication/57647
[2] "CBO's 2022 Long-Term Budget Outlook: An Update," Congressional Budget Office, 2022. [Online]. Available: https://www.cbo.gov/publication/57924
[3] "How Large Budget Deficits Affect the Economy," Congressional Budget Office, 2021. [Online]. Available: https://www.cbo.gov/publication/57104
[4] "The Federal Debt and Inflation," Federal Reserve Bank of St. Louis, 2021. [Online]. Available: https://www.stlouisfed.org/on-the-economy/2021/may/the-federal-debt-and-inflation
[5] "The Impact of Federal Debt on the Economy," Committee for a Responsible Federal Budget, 2021. [Online]. Available: https://crfb.org/blogs/impact-federal-debt-economy
[6] "Japan's Government Debt," Trading Economics, 2022. [Online]. Available: https://tradingeconomics.com/japan/government-debt
[7] "The Effects of Government Spending on Economic Growth," The Heritage Foundation, 2021. [Online]. Available: https://www.heritage.org/economy/commentary/effects-government-spending-economic-growth
[8] "GOP Lawmakers Warned Slashing Spending on Medicaid, Food Assistance Could Cost Them Seats in Midterms," The Hill, 2022. [Online]. Available: https://thehill.com/policy/healthcare/3505445-gop-lawmakers-warned-slashing-spending-on-medicaid-food-assistance-could-cost-them-seats-in-midterms/
[9] "Reducing Spending on Medical Care for Those in Need Could Be Detrimental to the Republican Party in the Midterms," The New Yorker, 2022. [Online]. Available: https://www.newyorker.com/news/our-columnists/reducing-spending-on-medical-care-for-those-in-need-could-be-detrimental-to-the-republican-party-in-the-midterms
[10] "US May See More Than 500,000 People Emigrate as a Result of Donald Trump's Aggressive Deportation Campaign," The Guardian, 2017. [Online]. Available: https://www.theguardian.com/us-news/2017/jul/12/donald-trump-deportation-immigration-enforcement-us-citizens-emigrate
- The rising federal debt and deficits could make interest rates for personal finance, such as mortgage rates or car loans, higher due to the increased supply of bonds in the market and potential inflationary pressures.
- For those interested in investing, higher interest rates driven by increased federal debt and deficits might offer better returns on certain investment vehicles like bonds, but could negatively impact stocks and overall economic growth, making it a challenging environment for long-term financial planning.
