Treasury yields have jumped to multiyear highs, with the government expected to pay an additional $1.1 trillion in interest over the coming decade — a pace that reportedly would surpass this year's defense expenses.
The Wall Street Journal, citing the Congressional Budget Office's latest estimates, reports only Social Security and Medicare are predicted to be bigger interest cost burdens in the years to come.
The jumps fuel worries that the yearslong acceleration in government borrowing will eventually weigh on economic growth and asset prices, which are a source of information about financial markets participants' expectations on key variables.
The Journal noted the pandemic sent rates to zero and sparked a surge in borrowing that added to years of mounting federal debt — resulting in the Treasury Department stepping up bond issuance to a record $23 trillion last year.
The cost of paying for that climbed as the Federal Reserve raised interest rates to multiyear highs above 5%, with America expected to spend $870 billion on interest payments this year, nearly double the annual average gross domestic product since 2000, the outlet reported.
"The debt will become a problem, but it's very hard to know exactly when," Campbell Harvey, director of research at Research Affiliates and a professor at Duke University's Fuqua School of Business, told the Journal.
Ultimately, higher borrowing costs on things like mortgages and corporate loans would slow the economy as consumer spending and business investment wane, the outlet noted.
"All else equal, a bigger government deficit means higher short-term and long-term interest rates," Lee Ferridge of State Street Global Markets told the outlet. "That means lower growth, and in theory, that means lower asset values as well."
Analysts are debating when all the debt becomes a drag, the Journal reported.
"My entire career there's been this 'sky is falling' kind of view on debt and federal deficits," Amar Reganti of Hartford Funds and former deputy director at the Treasury's Office of Debt Management, told the Journal. "And typically, it didn't impact day-to-day markets."
There are no painless solutions, the Journal reported — with neither austerity nor higher taxes politically convenient.
"When you have substantial reduction in deficit spending — whether by raising taxes substantially or cutting spending — there's an excellent chance you help precipitate a recession," Reganti told the outlet. "It becomes a vicious cycle."
Fran Beyer ✉
Fran Beyer is a writer with Newsmax and covers national politics.
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