AP Photo/Ron Thomas
- The view that the US can treat debt like "free lunch" is about to change, according to Kenneth Rogoff.
- The Harvard economist predicted interest rates would remain higher for the next decade.
- That's due to an array of pressures, like high military spending and deglobalization.
The view that America can take out debt like it's "free lunch" has to change, as interest rates will be elevated for the next decade, according to top economist Kenneth Rogoff.
The Harvard professor and former International Monetary Fund economist predicted that interest rates would likely stay higher than markets are used to, even if they temporarily fall ahead of the next recession.
That's due to an array of pressures that will keep borrowing costs up, including high debt levels, more military spending, and deglobalization. Experts have warned those factors could stoke inflation in the future, suggesting higher rates will be needed to the keep the economy in check.
"Even with the recent partial retreat in long-term real and nominal interest rates, they remain well above the ultra-low levels to which policymakers had grown accustomed, and they are likely to stay at such levels even as inflation retreats. It is now past time to revisit the widely prevailing 'free lunch' view of government debt," Rogoff said in an op-ed for Project Syndicate on Tuesday.
Higher-for-longer interest rates spell bad news for US finances, as it will cost more to service the nation's $33 trillion debt balance. Total interest payments on the national debt hit a record $659 billion for the 2023 fiscal year, Treasury data shows, nearly double the amount paid in 2020.
But that reality doesn't appear to be hitting some commentators, who still believe in a "lower forever" interest rate regime that allows for nearly cost-free debt, Rogoff said.
"While it is feasible to expand social programs or boost military capabilities without running large deficits, doing so without raising taxes is not costless. We are likely to find out the hard way that it never was," Rogoff warned.
The US, though, doesn't look to be slowing its pace of borrowing anytime soon. The total debt balance is edging closer to $34 trillion, with the US estimated to be adding around $20 billion of debt each day.