In a sobering assessment, the Congressional Budget Office (CBO) has raised concerns about the United States facing a potential bond market crisis akin to the turmoil experienced by the United Kingdom 18 months ago. The warning, issued by CBO Director Phillip Swagel, underscores the unprecedented trajectory of US government debt, now nearing $35 trillion, and the risks it poses to the economy and America’s creditworthiness.
Speaking to the Financial Times, Swagel highlighted the danger of a market reaction similar to that witnessed in the UK when former Prime Minister Liz Truss faced investor backlash over plans for unfunded tax cuts. While Swagel emphasized that the US is not yet in such a precarious position, he cautioned that escalating interest rates could trigger a market “snap back,” amplifying the cost of servicing debt, projected to exceed $1 trillion annually by 2026.
The specter of Britain’s bond market rout in September 2022 looms large, serving as a cautionary tale of the consequences of investor rejection of a government’s borrowing plans. In response to Truss’s proposals for increased debt issuance to fund tax cuts, UK government bonds and the pound plummeted, leading to a surge in borrowing costs and prompting intervention by the Bank of England.
The parallels between the UK’s experience and the current trajectory of US government debt raise concerns about the potential for a similar crisis on American shores. With debt levels soaring under both Republican and Democratic administrations, exacerbated by tax cuts and pandemic stimulus measures, economists warn of the risks associated with a burgeoning debt burden.
Fitch’s decision to downgrade the US credit rating in August underscores the seriousness of the situation, signaling alarm over the high and growing government debt burden. Moreover, the prospect of further borrowing, particularly if former President Donald Trump secures re-election in November, raises additional concerns about the sustainability of fiscal policy.
Against this backdrop, the increased cost of servicing debt, fueled by rising interest rates, poses significant challenges to US public services. With interest costs skyrocketing to $659 billion in fiscal year 2023 alone, the strain on the economy becomes increasingly palpable, diverting resources away from critical areas such as housing, transportation, and education.
As the CBO warns of continued escalation in government debt, the implications for economic growth, fiscal outlook, and policy flexibility become ever more pronounced. The imperative for policymakers to address the looming debt crisis grows more urgent, underscoring the need for prudent fiscal management and decisive action to safeguard America’s financial stability and long-term prosperity.