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Apr 2, 2024, 3:58pm EDT
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Semafor Signals

Skyrocketing US debt could trigger market shock, CBO chief says

Insights from The Financial Times, Bloomberg, and Fortune

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A digital advertisement displaying the National Debt counter, including what the federal government owes itself, sits on top of a building in the Times Square area of New York City, U.S., March 7, 2024.
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The News

U.S. government borrowing has hit “unprecedented” levels that could trigger a damaging market reaction if left unchecked, the head of Congress’ independent fiscal watchdog warned in an interview with the Financial Times.

Federal debt relative to gross domestic product is likely to rise above World War II levels — when it stood at 116% of GDP — by 2029, Phillip Swagel, director of the Congressional Budget Office cautioned.

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Ignoring the debt issue runs the risk of a market shock similar to the 2022 selloff in the U.K., when plans for sweeping tax cuts led to a run on the pound and forced then-Prime Minister Liz Truss to resign, he said.

While the U.S. is “not there yet,” government debt held by the public — which stood at $26.2 trillion, or about 97% of GDP, at the end of last year — is on an “unprecedented” trajectory, Swagel said. Bloomberg Economics has projected that in 88% of a million simulations, the country’s debt is “on an unsustainable path.”

Skyrocketing debt combined with high interest rates mean the country might not be able to afford crucial borrowing in the future, with the U.S. set to pay $1 trillion to creditors in 2026, the FT said. It could also, the CBO warned in a report, “erode confidence in the U.S. dollar as the dominant international reserve currency.”

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SIGNALS

Semafor Signals: Global insights on today's biggest stories.

Democrats and Republicans are both responsible

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Sources:  
The Financial Times, Bloomberg

The CBO’s warning shot comes as “years of fiscal profligacy by both Democrats and Republicans are storing up trouble for the US economy,” The Financial Times reported. Economists are concerned that Donald Trump has pledged to renew his 2017 tax cut program if reelected, increasing the national debt by an estimated $5 trillion. Treasury Secretary Janet Yellen told lawmakers in February that the Biden administration’s debt-reduction proposals “would continue to hold the level of interest expense at comfortable levels.”

Congress should act quickly, economists say, but likely won’t

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Sources:  
Fortune, Bloomberg

The U.S. Government Accountability Office said last month that Congress needs to make difficult decisions to address the federal debt pile, adding: “The sooner actions are taken to change the long-term fiscal path, the less drastic they will need to be.”

But, Bloomberg noted, delivering on any of those plans would require cooperation from a deeply divided Congress. “It may take a crisis…to force action,” the outlet reported. “That’s playing with fire.”

Fiscal crisis could come as early as next year

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Source:  
Fortune

Without a course correction, the vice dean of research at the University of Pennsylvania’s Wharton School told Fortune, a fiscal crisis is likely to occur in 2030 — or as early as 2025 if the next presidential administration rolls out an “expensive fiscal package that relies on implausibly rosy economic assumptions.”

But other economists are more optimistic. Columbia University Professor Brett House says a fiscal stimulus would probably be enough to stave off the worst effects, though he conceded that “a lot depends on what happens in the wake of the November election.”

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