JPMorgan has warned that the growing US public debt, which shows no signs of slowing, could pose a real problem for the US economy.
Every year, the US government increases its indebtedness, and analysts are quick to point out that the bill will eventually come due. How different is it this time?
It is not just that bonds have surpassed a record $34 trillion, but also high-interest rates, which are driving up debt servicing costs.
According to a recent study, annualized gross interest payments on US debt reached $1 trillion at the end of October, doubling from 19 months earlier.
But worse, if no action is taken, net interest costs could rise from 2.4% of GDP in 2023 to 3.7% and 6.7% in 2033 and 2053, respectively.
It should also be noted that increased debt issuance by the US Treasury to meet rising deficits threatens to crowd out private investment.
To be more precise, with the same trajectory of private sector money flowing into US Treasuries, the country could lose new private sector initiatives. At the very least, the situation does not look very sustainable in the long run.
In particular, investors became wary that the US might fail to address its fiscal imbalance and debt burden meaningfully, increasing the risk of a self-inflicted default.
In this context, it is unsurprising that foreign holdings of US debt have fallen from their 2009 peak of 50% in early 2023 to 27%, the lowest level since 2002.
It is also true that geopolitics does not exactly increase the attractiveness of US government debt for countries such as China, whose Treasury holdings fell in August to their lowest level in 14 years.
What could be the solution?
The obvious one is to reduce indebtedness or the budget deficit. The problem is that this is easier said than done, especially at voting time when parties are trying to win voters.
If the ruling party decides to cut back on some of its programs, it could provoke social unrest, something the current leadership cannot afford. Thus, the only option is to raise revenues.
But again, this is a challenging task, especially with presidential elections approaching. As raising taxes is not an option, the only hope is growth in export revenues.
The question is how to achieve this when the global economy is not in the best shape while US citizens continue to spend like there is no tomorrow.
What is the conclusion?
The higher the US public debt, the closer we are to a catastrophe. Given the current figures, it is not whether it will happen but when the consequences will come.
Lining one's pockets with long-term treasury bonds, in this sense, could be a risky business. Still, the yield is expected to fall, and prices increase in the short term as monetary policy changes.
As for potential signs that could indicate a shift in market sentiment, the volume indicator stands out, it is also advisable to keep an eye on data updates as they dictate the Fed's path.