DBG - Wall Street is starting to sound the alarm! Will interest payments on U.S. debt soon exceed defense spending?

With the U.S. debt exceeding 33 trillion, interest payments will soon become the government's largest spending item, threatening economic growth, and Wall Street is starting to sound the alarm...

US debt reached an all-time high of $33 trillion last week due to ballooning federal deficits and massive issuance of national debt.

To be sure, rising debt itself is not an automatic cause for concern, as it is not common for countries to fully repay large debts. On the contrary,A more meaningful metric might be the ability to service debt.

U.S. Treasury Secretary Janet Yellen said in an interview last Monday,The metric she most often uses to judge America's fiscal health is net interest as a percentage of GDP.

The current ratio is around 1%, but the Congressional Budget Office (CBO) projects that interest payments will account for 6.7% of GDP by 2053.According to this standard, by 2051, interest payments on the US debt will exceed spending on Social Security, making it the largest single expenditure by the federal government.

“It's clearly not sustainable. "Maya MacGuineas, the chairwoman of the Committee for a Responsible Federal Budget, a bipartisan research group in the United States, said: "The way to assess it is that if, as in the United States, debt is growing faster than the economy, and interest payments are growing faster than the economy, income, etc., it's a huge warning sign. Things are changing qualitatively now."

In fact, the CBO estimates that the US debt-to-GDP ratio will set a new record this decade, climbing from around 100% now to 107% in 2029, surpassing the peak of 106% in 1946.By 2053, this proportion is likely to reach 181%.

The US still has the most liquid bond market in the world and can issue new debt to investors as needed.

But here's the thing.When the government makes budget decisions, debt repayment must take precedence over other things, McGinnis said. If the debt cannot be repaid, the United States will face the risk of default, as it nearly did in June this year.

At current levels, interest payments have exceeded federal spending on youth education, andIn four years, interest payments will exceed defense spendingShe added, "When members of Congress know this, they will pay more attentionThis is a rather serious warning sign”。

She added that if the CBO's estimate is correct, thenNot only would federal programs be squeezed, it would also mean a stagnant economy and a diminished ability to invest in areas like national security.

Wall Street is also starting to sound the alarm.Recently, leading bond commentators have warned that yields will have to continue to rise, because only then will the Treasury continue to attract enough money to service its growing debt, which will only increase borrowing costs significantly.

McGinnis said that in order to reduce debt,Taxes must be raised on wealthy and middle-income Americans. At the same time, the government must also cut spendingThis includes cutting defense and social welfare spending if necessary.

"We know what to do, and there are a lot of reasonable plans. ButWe lack the political will to do so.In this hyper-partisan environment, politicians are busy promising that they won't do anything that needs to be done now, "says Mr. McGinnis.