Washington’s ballooning federal debt could become a burden for Americans
Washington has been on an alarming trajectory of increasing federal debt in recent years.
Federal debt held by the public is projected to rise to 118% in 2033 from 98% of GDP in 2023. That’s the highest it’s ever been, and it’s projected to nearly double in size by 2053.
How bad is it? Consider that the ratio was only 39% a quarter of a century ago.
This financial burden is a critical issue for policymakers and investors, with implications for financial markets, investors, and the broader economy.
The growing debt burden
As of the latest data, the U.S. federal debt stands at more than $33 trillion, equivalent to nearly $99,000 for every American.
This includes debt held by the public and intragovernmental holdings.
(Debt held by the public is owned by individuals, corporations, foreign governments, and other entities, while intragovernmental holdings represent debt that the federal government owes to itself, often held in trust funds like Social Security.)
Historically, major wars and economic crises fueled America’s largest deficits. Today's deficit, however, stems from more predictable factors.
Chief among them are an aging population, rising interest rates, escalating healthcare costs, and a tax system that falls short of funding government commitments.
Post-Covid inflation and the following interest rate hikes only accelerated an already unsustainable fiscal trajectory.
“As we have seen with recent growth in inflation and interest rates, the cost of debt can mount suddenly and rapidly,” said Michael A. Peterson, the chief executive of the Peter G. Peterson Foundation, which promotes fiscal restraint.
“With more than $10 trillion of interest costs over the next decade, this compounding fiscal cycle will only continue to do damage to our kids and grandkids.”
The direct and indirect effects of government over-spending
Washington's lavishness isn't just a federal budget problem. It can also negatively affect people's finances, both directly and indirectly.
For one, when the government borrows more, it raises demand for credit, driving interest rates upward. This, in turn, can weigh down stock prices in retirement accounts.
“Higher interest rates tend to lead to lower stock market returns” by raising the cost of borrowing for companies, according to Gus Faucher, chief economist for PNC Financial Services Group.
The impact on the economy usually isn’t as direct, but experts say deficits eventually catch up to economic growth.
“Once government debt reaches a certain size, it really drags on long-term [economic] growth,” says David Primo, a business professor at the University of Rochester.
As of August 2023, it costs Washington $808 billion to maintain the national debt, or 15% of total federal spending, according to the Treasury Department.
As the cost to service the debt grows, all eyes will be on the Fed to determine the next move. The central bank has raised interest rates 11 times since early 2022 and could be poised to hike again before next year.