The US government just added more than half a trillion dollars to its balance sheet in three months.
Data from the Treasury Department’s Debt to the Penny database shows the national debt rose from $33.896 trillion on December 27th to $34.573 trillion on March 27th – an increase of $677 billion.
The CEO of the world’s largest asset management firm, BlackRock, says the mounting pile of debt matters.
In a new letter to shareholders, Larry Fink breaks down the state of America’s balance sheet.
“In America, the situation is more urgent than I can ever remember. Since the start of the pandemic, the U.S. has issued roughly $11.1 trillion of new debt, and the amount is only part of the issue. There’s also the interest rate the Treasury needs to pay on it.
Three years ago, the rate on a 10-year Treasury bill was under 1%. But as I write this, it’s over 4%, and that 3-percentage-point increase is very dangerous. Should the current rates hold, it amounts to an extra trillion dollars in interest payments over the next decade.
Why is this debt a problem now? Because historically, America has paid for old debt by issuing new debt in the form of Treasury securities. It’s a workable strategy so long as people want to buy those securities — but going forward, the U.S. cannot take for granted that investors will want to buy them in such volume or at the premium they currently do. Today, around 30% of U.S. Treasury securities are held by foreign governments or investors. That percentage will likely go down as more countries build their own capital markets and invest domestically.”
Fink believes the ballooning debt represents a real threat to the country’s fiscal future.
“More leaders should pay attention to America’s snowballing debt. There’s a bad scenario where the American economy starts looking like Japan’s in the late 1990s and early 2000s, when debt exceeded GDP and led to periods of austerity and stagnation.
A high-debt America would also be one where it’s much harder to fight inflation since monetary policymakers could not raise rates without dramatically adding to an already unsustainable debt-servicing bill.”
Although the current trajectory is concerning, Fink says a debt crisis is not inevitable.
“While fiscal discipline can help tame debt on the margins, it will be very difficult (both politically and mathematically) to raise taxes or cut spending at the level America would need to dramatically reduce the debt. But there is another way out beyond taxing or cutting, and that’s growth. If U.S. GDP grows at an average of 3% (in real, not nominal terms) over the next five years, that would keep the country’s debt-to-GDP ratio at 120% – high, but reasonable.
I should be clear: 3% growth is a very tall order, especially given the country’s aging workforce. It will require policymakers to shift their focus. We can’t see debt as a problem that can be solved only through taxing and spending cuts anymore. Instead, America’s debt efforts have to center around pro-growth policies, which include tapping the capital markets to build one of the best catalysts for growth: Infrastructure. Especially energy infrastructure.”
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