US starts fiscal year with record $31 trillion in debt

US starts fiscal year with record $31 trillion in debt
FATIMA HUSSEIN
Tue, October 4, 2022 at 4:08 PM

WASHINGTON (AP) — The nation's gross national debt has surpassed $31 trillion, according to a U.S. Treasury report released Tuesday that logs America's daily finances.

Edging closer to the statutory ceiling of roughly $31.4 trillion — an artificial cap Congress placed on the U.S. government’s ability to borrow — the debt numbers hit an already tenuous economy facing high inflation, rising interest rates and a strong U.S. dollar.

And while President Joe Biden has touted his administration's deficit reduction efforts this year and recently signed the so-called Inflation Reduction Act, which attempts to tame 40-year high price increases caused by a variety of economic factors, economists say the latest debt numbers are a cause for concern.

Owen Zidar, a Princeton economist, said rising interest rates will exacerbate the nation's growing debt issues and make the debt itself more costly. The Federal Reserve has raised rates several times this year in an effort to combat inflation.

Zidar said the debt “should encourage us to consider some tax policies that almost passed through the legislative process but didn't get enough support,” like imposing higher taxes on the wealthy and closing the carried interest loophole, which allows money managers to treat their income as capital gains.

“I think the point here is if you weren't worried before about the debt before, you should be — and if you were worried before, you should be even more worried," Zidar said.

The Congressional Budget Office earlier this year released a report on America's debt load, warning in its 30-year outlook that, if unaddressed, the debt will soon spiral upward to new highs that could ultimately imperil the U.S. economy.

In its August Mid-Session Review, the administration forecasted that this year’s budget deficit will be nearly $400 billion lower than it estimated back in March, due in part to stronger than expected revenues, reduced spending, and an economy that has recovered all the jobs lost during the multi-year pandemic.

In full, this year’s deficit will decline by $1.7 trillion, representing the single largest decline in the federal deficit in American history, the Office of Management and Budget said in August.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget said in an emailed statement Tuesday, “This is a new record no one should be proud of.”

“In the past 18 months, we’ve witnessed inflation rise to a 40-year high, interest rates climbing in part to combat this inflation, and several budget-busting pieces of legislation and executive actions," MacGuineas said. “We are addicted to debt."

A representative from the Treasury Department was not immediately available for comment.

Sung Won Sohn, an economics professor at Loyola Marymount University, said “it took this nation 200 years to pile up its first trillion dollars in national debt, and since the pandemic we have been adding at the rate of 1 trillion nearly every quarter."

Predicting high inflation for the “foreseeable future,” he said, “when you increase government spending and money supply, you will pay the price later."

Rate Hikes May Add $1T to National Debt Interest
By NATHAN REIFF Published October 05, 2022

It's not just higher mortgage payments: Increases to the target range for the federal funds rate by the Federal Open Market Committee (FOMC) could mean the U.S. will pay as much as $1 trillion more this decade on interest payments for the national debt, according to the Peter G. Peterson Foundation.

With inflation at its highest rate in decades, the U.S. Federal Reserve has repeatedly increased benchmark interest rates in recent months. As of October 2022, the federal funds rate ranged from 3% to 3.25%, compared with close to 0% early in the COVID-19 pandemic. While the rate is already the highest since 2008, analysts expect the Fed to keep pushing it up this year.

KEY TAKEAWAYS
The U.S. Federal Reserve has increased the federal funds rate to between 3% and 3.25% through a series of hikes in recent months.
Higher national interest rates could mean higher interest payments by the U.S. government on the national debt.
Deficit advocacy organization the Peter G. Peterson Foundation has estimated that Fed interest rate hikes could lead to $1 trillion in added interest rate payments in the years to come.
Higher Rates Could Mean More Costly Debt
The U.S. has borrowed heavily in recent years to address the pandemic and to facilitate major tax cuts.
Now, as the Fed moves to combat inflation, the interest the government owes on public debt could jump. Since borrowing costs for the U.S. government rise and fall along with interest rates, an increase in the federal funds rate to a predicted 4.6% by the end of 2023 could drastically increase the cost of debt.

The Congressional Budget Office (CBO) has forecast that President Biden's 2023 budget would lead to federal deficits over the 2023-2032 period of $13.1 trillion, compared with a previous estimate of $8.1 trillion.

Even small changes to national interest rates can lead to significant changes in public debt interest payments: If rates rise to a single percentage point above the CBO's estimates for the next several years, it could mean that the U.S. will spend more on interest payments than national defense by 2029.

Complicated Picture of Inflation, Recession Concerns, and Economic Growth
Recent months have been particularly volatile for the U.S. economy, as investors alternate between concern about a significant recession and optimism about future growth. A recent government report suggesting job growth is slowing may have bolstered investor confidence that the Fed could slow its pace of rate increases.

At the same time, the CBO and the Biden administration have recently shown confidence in the overall growth, forecasting that national debt as a portion of the size of the broader economy will decline over the next year. That happens when the economy grows faster than the national debt.

President Biden has said that achieving cuts to the national deficit is a top fiscal priority.

Yet the non-partisan Committee for a Responsible Federal Budget estimates that his administration has added $4.8 trillion to the deficit tsince taking office last year.

By early October, the U.S. national debt exceeded $31 trillion for the first timer.

All told, an increasing debt load and higher interest payments could lead to a global loss in confidence in the nation's ability to repay its debts, which in turn could further exacerbate inflation, interest rate increases, and other economic concerns.

What Is Happening With the National Debt?
In early October, the U.S. national debt climbed above $31 trillion for the first time. As the Fed increases interest rates, the U.S. government will likely have to pay a substantial amount more in interest payments in the coming years.

What Will Happen if the National Debt Keeps Rising?
The higher the national debt, the more likely it is that investors could consider the U.S. a global credit risk and unable to repay what it owes.

What Is the Impact of the Federal Funds Rate on National Debt?
The higher the federal funds rate, the more the U.S. government may have to spend in interest payments on the public debt. By some estimates, Federal Reserve interest rate hikes that have taken place in recent months could contribute to up to $1 trillion in additional interest payments.

The Bottom Line
The U.S. Federal Reserve has instituted a series of interest rate hikes in an effort to combat the worst inflation seen in decades. At the same time, heavy government borrowing has continued to grow the U.S. national debt. In combination, higher interest rates could obligate the government to significantly increase the amount it pays in interest payments on the national debt in the years to come.