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- The US can't rely on growth to avoid dealing with its $33 trillion debt mountain, according to researchers.
- The government is on track to hit a record-high debt-to-GDP ratio by 2029.
- Higher interest rates means the cost of servicing that debt could be unsustainable, experts say.
The US's $33 trillion debt mountain is bound to grow even larger – and policymakers and legislators can't rely on the economy simply growing its way out of its debt problems, according to the Peter G. Peterson Foundation.
The research group, which is a nonpartisan organization dedicated to monitoring and spreading awareness of fiscal issues facing the US, pointed to the ballooning public debt balance, with the US debt-to-GDP ratio hitting 97% at the end of the 2022.
Debt-to-GDP is expected to notch 98% by the end of 2023, according to projections from the Congressional Budget Office. At that pace, the US is on track to rack up debt equal to 107% of GDP by 2029, the highest debt-to-GDP ratio ever recorded, the foundation said.
The nation's debt-to-GDP ratio hit an all-time-record in the years following World War II, with the public debt amounting to 106% of GDP in 1946. That ratio slumped over the following decades due to a cocktail of amiable market conditions and a post-war economic boom – but there's no way that's happening this time, researchers said.
"Given current projections for large primary deficits, demographic trends, and Federal Reserve policy focusing on controlling inflation, the United States should not be expected to grow out of its debt simply through rapid growth of GDP," researchers said in a note on Wednesday. "As a result, approaching an all-time high for the debt-to-GDP ratio should be a wakeup call for lawmakers, and there are many available policy solutions designed for the current fiscal and economic outlook.
The US's World War II debt was largely brought down by primary surpluses in the national budget, as well as the Fed putting a ceiling on Treasury and bond yields, which kept the government's cost of borrowing artificially low. That was supplemented by a boom in economic growth, which boosted US GDP.
Though US GDP is expected to grow an eye-popping 5.4% over the third quarter, the government doesn't on track to reduce its budget deficit anytime soon. Lawmakers have yet to agree on a new budget for the fiscal year, making a shutdown event in 2023 still likely.
Meanwhile, the Fed has warned that interest rates will stay higher-for-longer as it keeps a close eye on inflation. Recently, Fed Chair Powell even said the central bank would let the current volatility in the bond market play out, despite the 10-year US Treasury yield briefly touching 5% this week.
That spells bad news for borrowers — including the US government. Higher rates and bond yields could make US debt servicing costs increasingly unsustainable, experts say, with the interest expense on the national debt potentially rising to a new record by 2025, Goldman Sachs estimated.
Not to mention, the government has a whopping $7.6 trillion of debt that's about to mature over the next year – a sum 31% of the US's total debt balance.
Mounting fears over the US debt means the government could have trouble finding buyers for Treasurys. That could lead to failed Treasury auctions, according to one Columbia Business School professor, wherein the Fed would have to step in to buy US debt securities, a move that could end up fanning inflation further.