What Is America’s Fiscal Situation?

 The United States is in danger financially. America owes $32.7 trillion in debt. Thirty-year home mortgages are at two-decade-high rates. Yet, there are some analysts who are hyping rising interest rates. Why are they celebrating?  Preston Brashers, a senior policy analyst who focuses on tax policy at The Heritage Foundation, discussed the situation. 

One of the most reliable indicators of a looming recession is when the rates on short-term Treasury securities are higher than those of long-term Treasury bonds. And for the last several months, that’s exactly what we’ve had: short-term rates much higher than long-term rates. This usually means that a recession is coming soon.

In normal times, the Treasury Department must pay a higher interest rate for longer-term bonds to entice investors to lock their money into, say, a 10-year bond rather than a more flexible three-month or one-year security.

But when investors expect a recession, they anticipate that the Federal Reserve will cut interest rates to try to stimulate the economy. This makes bondholders want to lock in long-term debt before rates – and bond yields – fall. Meaning they’re willing to accept lower interest rates on long-term debt than short-term debt.

Since May, but especially over the last month, interest rates on long-term Treasurys have risen much faster than rates on short-term Treasurys, partly closing the gap in rates. This could be because investors have become more confident that we’ll avoid a recession in the next year or so – so they don’t expect the Fed to cut rates. But it could also suggest that they’re more worried about a resurgence in inflation or the unsustainability of America’s deficits forcing the Treasury to pay more to convince markets to buy trillions more in federal debt.

There’s strong evidence for the latter: The federal budget deficit in the first 10 months of the 2023 fiscal year has more than doubled compared to the same period last year, increasing by 122%. On Aug. 1, one of the three major credit rating agencies, Fitch, downgraded U.S. debt from a AAA rating to AA+ specifically because of that soaring debt.

Deficits were higher at the height of the government response to the COVID-19 pandemic than they are today. But today’s deficits are even more troubling for two reasons.

Brashers’ two troubling reasons are: (1) In 2020, one could have believed that large deficits were temporary. If true, the deficits should have returned to normal. However, $2 trillion plus in deficits is now the new normal. (2) The recent surge in interest rates makes the deficits even more problematic. They were kept in check by near-zero rates from 2008 to 2021.  It appears that “easy money is a thing of the past.” America has been reckless for decades about fiscal responsibility and is now facing a bill that “appears to be coming due sooner and steeper than previously anticipated.”