The rapid increase in the United States government debt has raised concerns about its scale and implications for the future economy.
This article delves into the challenges associated with the growth of U.S. government debt, the impact of rising interest rates, and the risks to the financial system, providing an outlook for the future.
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■ The Increase in U.S. Government Debt
The current U.S. government debt stands at $8.35 trillion, approximately ¥125 trillion. This substantial growth, particularly in the third quarter of 2023, surpasses Japan’s annual budget of ¥114 trillion for the fiscal year 2023’s general account total.
The total government debt has also reached $33.2 trillion, setting a new record, expanding by $1.7 trillion (about ¥255 trillion) since hitting the U.S. debt ceiling in January.
The primary driver of this increase is the expansion of fiscal expenditures, notably the $1.9 trillion COVID-19 relief package known as the “American Rescue Plan Act,” which accounted for 7.7% of GDP.
This surpasses the 5.5% of GDP allocated under the “American Recovery and Reinvestment Act” during the Obama administration shortly after the 2008 financial crisis. The Biden administration, holding a majority in both houses of Congress, has enacted three such bills.
These policies may lead to greater spending than initially forecast, with the Inflation Reduction Act (IRA) budget model revising its projections by 2.7 times.
The “Responsible Federal Budget Committee” has proposed measures to increase revenues, such as introducing a minimum corporate tax rate and reducing prescription drug prices, in an attempt to offset these spending increases.
However, the University of Pennsylvania’s budget model suggests that over $1 trillion in expenses are predicted for climate and energy alone, making deficit reduction a challenging task.
The U.S. government’s cash reserves have diminished due to reaching the debt ceiling, forcing increased issuance of U.S. bonds. Net issuance of U.S. bonds by the end of September reached $1.76 trillion, the highest since 2010, following the aftermath of the 2008 financial crisis.
The fiscal deficit for the 2023 fiscal year has reached $1.695 trillion, a 23% increase from the previous year, and with interest rates remaining high, the burden of interest payments is also expanding.
Interest payments for 2023 amount to $879.3 billion, which will be further burdensome if U.S. interest rates continue to rise.
■ Debt Reduction Strategies and Challenges
Debt reduction is essential, but its execution presents numerous challenges. Debt reduction strategies encompass a combination of measures involving both expenditure reduction and revenue increases.
Let’s explore the challenges associated with debt reduction and their impact.
The necessity of debt reduction is a crucial step towards long-term fiscal stability. The government needs to work on reducing future fiscal deficits to support sustainable economic growth.
Debt reduction strategies involve measures like cutting expenditures and increasing revenues to create a plan to reduce fiscal deficits. However, executing effective debt reduction strategies can be difficult due to political challenges and the uncertainty of achieving the desired outcomes.
Forming consensus among different factions in Congress and the government, particularly given the difficulty in reaching agreement, makes implementing effective debt reduction strategies a challenging task.
Expenditure reductions might include measures affecting areas like climate change mitigation, energy security, extending healthcare subsidies, and drought relief for the western regions.
These reductions could lead to cuts in government programs and services, potentially affecting specific interest groups and individuals in need of support.
On the other hand, revenue-increasing measures like introducing a minimum corporate tax rate and reducing prescription drug prices could place burdens on corporations and pharmaceutical companies, potentially impacting the economy.
Careful consideration is required in choosing debt reduction strategies, as their implementation involves complex political decisions.
■ Impact of Rising Interest Rates and Market Reactions
Rising interest rates are a factor with direct implications for government debt and financial markets. The fact that the yield on U.S. 10-year Treasury bonds exceeded 5% for the first time is a notable sign of interest rate increases.
Let’s examine the impact of this rise in interest rates and how the market has reacted.
The rise in interest rates increases the burden of interest payments on government debt. Interest payments for 2023 amount to approximately ¥131 trillion, and in a period of rising interest rates, this burden will become even more substantial.
High interest rates can increase borrowing costs for individuals and businesses, potentially placing a greater burden on the economy. Furthermore, rising interest rates can cause bond prices to fall, reducing the value of held bonds, affecting long-term investors.
Market reactions include notable investors like Bill Ackman buying back short positions in U.S. bonds.
This action is a precautionary move in response to potential risks, such as a rapid slowdown in the U.S. economy, reflecting concerns in the market. Temporary drops in the yield of U.S. 10-year bonds have also been observed, indicating that the impact of rising interest rates has rippled through the market.
These reactions reflect concerns about the impact of rising interest rates on the economy and the financial market.
■ Risks to the Financial System and Future Prospects
Risks to the financial system and future prospects are significantly influenced by the increase in government debt and rising interest rates. Considerations on these risks are necessary.
The rise in credit card delinquency rates, particularly among non-top 100 banks, is at its worst level, signaling concerns about individual creditworthiness and an increased risk of debt defaults for financial institutions.
Subprime auto loan delinquency rates have also reached their highest level, potentially impacting the entire financial system.
The accumulation of loan loss provisions for commercial real estate (CRE) is also on the rise, putting pressure on bank earnings. Loan loss provisions for office CRE, in particular, are increasing and affect bank lending overall.
Reduced bank deposit balances and additional loan loss provisions are raising concerns about potential capital shortfalls, threatening the stability of the financial system and affecting the profitability and health of financial institutions.
■ Conclusion
Risks to the financial system are on the rise, and there is a significant level of uncertainty in the future.
Policymakers and financial institutions need to exercise prudent risk management to maintain the soundness of the financial system.
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