US debt exceeds US$40 trillion and puts pressure on long-term interest rates, says Bloomberg Television

The United States' national debt exceeded US$40 trillion, and the issue has practically disappeared from Washington's political agenda, according to a report from Bloomberg Television. In the bond market, the volume of government debt is pointed out as one of the main suspects for the rise in long-term interest rates, which have reached levels not seen since the global financial crisis.

The contrast with the past is striking. In 1998, under Bill Clinton, the US recorded its first budget surplus in almost three decades. The government has been in the black for four straight years, peaking at about $236 billion in 2000. Today, persistent deficits mean more borrowing every year, and it has been more than two decades since the last balanced budget.

The cost reaches families

Natasha Sarin, co-founder of the Yale Budget Lab, said the American fiscal situation "is not good and is deteriorating." According to her, the ratio between debt and GDP should rise to 130% in the next decade. Sarin noted that the number drops to $33 trillion if intragovernmental transfers are excluded.

For the economist, the numbers are connected to the cost of living. She attributes part of the US flirting with mortgage rates above 7% to the link between what households pay and the rate at which the government can finance itself. The larger the debt, he argues, the riskier the borrower, especially because a large part of the liabilities are short-term and need to be rolled over, possibly at higher interest rates.

In the group's work, according to Sarin, this link between interest paid by the government, car financing and mortgages represents thousands of dollars in additional costs for the average family.

Social law and revenues at the center of the debate

Former House Speaker Paul Ryan said it's not too late, but that the country is "losing room for maneuver." He recalled that, in the 2010s, Republicans approved four budgets in the House with plans to pay off the debt, affecting Medicare and Medicaid. In his assessment, the party leadership, with Donald Trump at the helm, later concluded that the agenda did not yield votes and abandoned it. Ryan stated that the country is heading towards a debt crisis.

Ryan advocates reforming entitlement programs and believes the bond market would lend credence to a credible debt reduction plan. Sarin warned that the Social Security fund will be depleted during the next president's term, which, without changes, would imply linear cuts of 28% in benefits.

Regarding revenue, Ryan estimated that revenue, currently just above 17% of GDP, could reach around 20% with tax reform, without sacrificing growth. Spending, however, is at 24% of GDP and rising, and, in his view, the problem cannot be resolved without attacking spending. Sarin, in a study with Kim Clausing, proposes raising US$15 trillion, with a rate of 28% or 30% for the 2% most profitable companies and combating profit transfer, in addition to recovering around US$800 billion annually in taxes owed and not collected.

For investors, the report's message is that the American fiscal trajectory continues to put pressure on long interest rates and, by extension, on credit and risk appetite. Sarin assesses that recent interventions, such as the action on the yen and the repurchase of long bonds, are not significant given the scale of the problem, and that the rise in yields tends to force the fiscal discussion.

Automatically translated from Portuguese.