America, you have a debt problem – and it is going to kill you

America is on the edge of a financial cliff, and the music’s about to stop. Imagine this: a giant weighing scale where on one side, we have the U.S. economy, buzzing with life, dreams, and burgers. On the other, a colossal heap of debt that’s about to tip the balance. The Congressional Budget Office (CBO) rang the alarm bells, revealing a scenario where the U.S. federal government debt spirals from 97% of GDP last year to a staggering 116% by 2034. Think about that. It’s a number that overshadows the debt levels during World War II, and frankly, the view from here is not pretty.

The Forecast Isn’t Sunny

Dive a bit deeper, and things gets bleaker.

The CBO’s forecast, optimistic at its heart, fails to consider some harsh realities. Market pundits, adjusting for real-world interest rates, envision the debt-to-GDP ratio climbing to 123% in 2034. Keep Trump’s tax cuts in the mix, and the fiscal burden becomes even more daunting.

It’s a game of simulations, with Bloomberg Economics running a million of them to gauge the fragility of America’s fiscal future. The verdict? In 88% of these scenarios, the U.S. is on an express train to unsustainable debt levels, setting off alarm bells across the board. Despite this, the Biden administration waves the flag of fiscal sustainability, pinning hopes on tax hikes for corporations and the wealthy. Yet, with a Congress split down the middle, finding common ground is akin to threading a needle in the dark.

Republicans seek drastic spending cuts, while Democrats argue for the importance of maintaining spending, focusing instead on interest rates and tax revenues. It’s a standoff with no easy way out, and the specter of a crisis looms large, potentially igniting a firestorm in the Treasuries market or triggering panic over the future of Medicare or Social Security.

Remember last summer’s taste of chaos? A Fitch Ratings downgrade and a surge in long-term Treasury debt issuance sent ripples through the market, showcasing just how quickly confidence can wane. The U.S. might dodge the bullet thanks to the dollar’s dominance, but complacency is a luxury we can’t afford.

Variable Variables and a Partisan Divide

The CBO’s assumptions on key variables like GDP growth and inflation might seem reasonable at a glance, but optimism clouds their forecasts. The expectation that discretionary spending will merely keep pace with inflation rather than GDP growth paints an unrealistic picture, especially with defense needs on the rise amidst global instability.

The market, skeptical of the CBO’s benign interest rate outlook, signals higher borrowing costs on the horizon. This skepticism is not without merit, as adjustments for market expectations hint at a debt level hitting 123% of GDP by 2034. Such a burden would significantly impact the U.S., with debt servicing costs potentially overtaking major budget areas like national defense and social security.

Prominent voices across the political and financial spectrum have raised concerns over this unsustainable path. From Fed Chair Jerome Powell to ex-Treasury Secretary Robert Rubin, the message is clear: the time for action is now. Yet, the bitter pill of bipartisan politics makes a cohesive approach to tackling this issue elusive.

The standoff over the debt ceiling last summer is a case in point, bringing the U.S. to the brink of default. With the debt ceiling issue postponed until 2025, another showdown looms, threatening to reignite tensions. Amidst these challenges, the U.S.’s fiscal stability hangs in the balance, with potential global repercussions if confidence in the dollar and U.S. Treasury securities wanes.