Debt Danger Ahead: Outlook on US Economy

In the eyes of leading economists, the US is heading towards decades of irrevocable debt. 

Recent projections from the Congressional Budget Office (CBO) reveal “debt held by the public increases from 99% of its Gross Domestic Product (GDP) at the end of 2024 to 116% of GDP—the highest level ever recorded—by the end of 2034. After 2034, debt would continue to grow if current laws generally remained unchanged.” The deficit currently stands at $1.6 trillion, but will climb to $1.8 trillion in 2025, before circling back to $1.6 trillion by 2027. Subsequently, a consistent upward trend emerges, with deficits gradually escalating to reach $2.6 trillion by the year 2034.

However, what unfolds in the next decade may be even grimmer than these projections suggest. The CBO’s forecasts, unveiled earlier this year, rely on a series of optimistic assumptions spanning from tax revenue to defense expenditures and interest rate dynamics. Yet, should one incorporate the prevailing sentiment in the market regarding interest rates, the debt-to-GDP ratio catapults to a daunting 123% by the year 2034.

This disparity is leading many to question: What actions should Americans take in preparation for such a daunting economic outlook? Can investors weather this downtrend or will capital run dry in an intensified time of uncertainty? How are leaders of financial institutions and government agencies approaching this conversation?

Using the AlphaSense platform, we share outlooks from leading economists so as to help you answer these pressing questions and more. 

Descent into Economic Turmoil

The CBO’s March report (which estimates that by 2054 public debt will represent 166% of GDP, reaching $141.1 trillion) shares a troubling look into the future: national debt threatens to unleash a cascade of economic woes, potentially plunging the United States into a protracted era of financial turmoil—one that will cost Americans their homes, spending power, and national security, followed by a decade of stagnation. 

At present, the country’s staggering debt stands at a colossal $34 trillion, nearly equivalent to 99% of GDP. And the CBO forecasts a continuous ascent in the debt trajectory over the coming three decades, eventually surpassing the historic pinnacle reached during WWII (106% of GDP in 1946) by 2029.

This dire prognosis is gaining the attention of a swelling cohort of analysts and experts, who are increasingly vocal in their apprehensions about the alarming rate at which the U.S. government is amassing debt. More critically, they harbor deep concerns that ballooning debt may render the nation incapable of securing essential future borrowings, exacerbating the strain of servicing existing debt obligations.

The nation’s increasing debt, the CBO writes, “will slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices.”

The report goes on to add that the likelihood of a financial crisis is increasing as a result of growing debt, something which would reignite interest rates  and if paired with higher inflation, “could erode confidence in the U.S. dollar as the dominant international reserve currency.” 

Mapping Out Potential Financial Demise

While the CBO’s projections alone are alarming, some experts believe they don’t take into account a number of factors that would indicate a more severe economic reality. Based on a million simulations Bloomberg’s financial team ran, 88% showed that the current debt-to-GDP ratio was on an unsustainable path:   

“From tax revenue to defense spending and interest rates, the CBO forecasts released earlier this year are underpinned by rosy assumptions. Plug in the market’s current view on interest rates, and the debt-to-GDP ratio rises to 123% in 2034. Then assume—as most in Washington do—that ex-President Donald Trump’s tax cuts mainly stay in place, and the burden gets even higher.”

Therefore, debt would actually balloon to 123% of GDP in the next decade, implying servicing costs of nearly 5.4% of GDP. This figure surpasses federal spending on national defense in 2023 by over 1.5 times and stands on par with the entire Social Security budget. Significant intervention would be necessary to erode investor trust in US Treasury debt as the ultimate secure asset. 

When examining inflation-adjusted interest expenses, a metric favored by Treasury Secretary Janet Yellen, the debt appears more manageable. In merely 30% of Bloomberg’s simulations did this metric surpass Yellen’s preferred threshold of 2% of GDP. 

Ultimately, achieving a genuinely sustainable debt trajectory hinges on congressional intervention. However, with current partisan divides, the likelihood of such action outside of a crisis scenario seems slim.

Perspectives from Economic Leaders

Searching for perspective on the CBO’s troubling projections? Gain a clearer picture of how executive leadership across industries are discussing the country’s fiscal health through earning transcripts sourced from the AlphaSense platform.

“Stimulative fiscal policy out of Washington is working against restrictive monetary policy from the Fed. And while inflation has decreased significantly from the peak seen in 2022, it still remains far above the Fed’s target level of 2%. So the odds of monetary policy and funding rates remaining higher for longer look very high.”

– Bimini Capital Management, Inc. | Earnings Call Q1 2024

“Fast forwarding to today, we are witnessing yet another round of policy changes in Washington that will kick off this next era of the mortgage market. The outgoing era, characterized by a 41% increase in home prices since 2020, was fueled by extremely accommodative Fed monetary and government fiscal policy in response to the COVID-19 pandemic. With benchmark Fed rates reduced to effectively 0 during this period, banks had an almost limitless supply of deposit capital to lend as the country battled COVID.”

– Redwood Trust, Inc. | Earnings Call Q2 2023

“The Fed has raised rates over 500 basis points. They’re doing QT, but fiscal policy coming out of Washington is not in alignment whatsoever. It’s very much stimuli–huge deficits. So monetary policy and fiscal policy are working at odds and that kind of leads you to think, well, maybe that’s why the Fed is not having the success that they had hoped. Growth is still fairly robust. Inflation is still strong. The labor market is still strong.”

– Orchid Island Capital, Inc. | Earnings Call Q1 2024

“So I interpret that as doubts in the market about whether the U.S. was really going to return or not in a timely manner, get fiscal policy under control and get–monetary orthodoxy, and the Fed hasn’t raised the policy rate into March of 2022, and it wasn’t clear how aggressively we’re going to act. They’re predicting quite a bit of inflation over a 2-year, 5-year horizons, then the Fed did take dramatic action. And actually the biggest, steepest fall there is associated with the June 2022 meeting. That was the first meeting where we moved 75 basis points at 1 meeting and it started to become clear that we’re going to move that fast during the remainder of 2022.”

“All of that brought inflation expectations under control. It also became clear that Congress was not going to pass another bill that had a lot of depth of spending in it. And as you got through the rest of the year, inflation expectations came back under control into 2023… The monetary fiscal response, impulse to the pandemic caused too much inflation. To eliminate that, we had to return to rectitude on both fiscal and monetary policy. This has happened and inflation fell.”

– Board of Governors of the Federal Reserve System | Special Call

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