With government debt exceeding $34 trillion, America is on a path to financial ruin.

opinion

by desmond ruckman

When one of Ernest Hemingway’s characters was asked how he became bankrupt, he famously said: Gradually and then suddenly. ”

Judging by the dire state of our nation’s finances, I can’t help but wonder if the same can be said about the U.S. government. On Tuesday, the Treasury Department reported that our nation’s public debt now exceeds $34 trillion.

First, we are slowly becoming bankrupt by allowing the public debt to increase year after year, regardless of which party is in power.

Republicans want to cut taxes when in power, but both parties are reluctant to cut public spending.

When Democrats are in power, they like to increase spending to advance social agendas.

Now that interest rates have returned to higher (more normal) levels, foreigners are reluctant to increase their holdings of large U.S. Treasuries, and unless policy direction changes, foreigners will be forced to do so. The government is at risk of sudden bankruptcy as rating agencies warn that it will run out of money. Downgrade a country’s credit rating.

It is no exaggeration to say that our country’s finances are in a dire state.

It’s not just that debt as a percentage of GDP is rapidly approaching levels at the end of World War II. It also means we will continue to run extremely large budget deficits, further increasing already unhealthy debt levels.

The unemployment rate is near its lowest level since the war, and at a time when we should be running a fiscal surplus, our country has managed to run a deficit of nearly 6% of GDP.

To make matters worse, the Congressional Budget Office warns that based on current policies, deficits will remain at current levels for as long as we can see.

Given the current state of polarization in Washington, there is no sign that policy direction will change anytime soon.

Large deficits can be managed if the government can raise funds at very low interest rates.

That was the case until recently. In fact, until recently, interest rates remained unusually low as the Federal Reserve bought large amounts of government bonds to stimulate the economy in the wake of the pandemic.

However, the situation is very different when governments have to finance deficits and roll over maturing debt at high interest rates.

Increasing debt servicing costs will only widen the deficit further, and there is a risk that debt will grow exponentially.

Underscoring this point is the fact that the 10-year Treasury rate rose to 4% from less than 1% in 2020 as the Federal Reserve stepped on the brakes on monetary policy to curb inflation.

Unfortunately, there are many reasons to think that interest payments will put more and more strain on your finances.

First, concerns about continued inflation will force the Fed to keep interest rates higher than they otherwise would be.

Meanwhile, foreign governments are likely to continue reducing their large holdings of U.S. Treasuries, especially if credit rating agencies downgrade their credit scores.

As a result, interest payments will continue to be the fastest-growing expenditure item in government budgets, potentially reaching about 3.4% of GDP by 2030, according to the Committee for a Responsible Federal Budget.

None of this means the US will default. Unlike other governments that finance their finances with foreign currencies, the U.S. government finances itself with dollars.

This means that if foreign creditors go on a loan strike, the Fed can always print dollars to meet the government’s borrowing needs.

A fly in the ointment: That would be a sure recipe for a dollar crisis and further inflationary explosion.

A better solution, of course, is to control spending, but don’t expect Washington to make much progress on that.

Still, last year’s spike in inflation, along with warnings from credit rating agencies and sales of foreign government bonds, should send a clear message that our nation’s finances are on a perilous path.

Please pray that Washington receives and finds that message soon. Several How to change course before it’s too late.

Desmond Luckman is a senior fellow at the American Enterprise Institute. He was Deputy Director of Policy Development and Review at the International Monetary Fund and Chief Emerging Markets Economics Strategist at Salomon Smith Barney.