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Debt burdens have grown so large — - growing threat --
Yet, in a year of elections around the world, politicians are largely
ignoring the problem, unwilling to level with voters about the tax
increases and spending cuts needed to tackle the deluge of borrowing.
from
https://www.cnn.com/2024/07/02/economy/global-debt-crisis/index.html
The world is sitting on a $91 trillion problem. ‘Hard choices’ are coming Hanna Ziady
Analysis by Hanna Ziady, CNN
6 minute read
Updated 9:44 AM EDT, Tue July 2, 2024
196 comments
The US Treasury building in Washington, DC, in January 2023. Saul Loeb/AFP/Getty Images
London
CNN
—
Governments owe an unprecedented $91 trillion, an amount almost equal to
the size of the global economy and one that will ultimately exact a
heavy toll on their populations.
Debt burdens have grown so large — in part because of the cost of the pandemic — that they now pose a growing threat to living standards even
in rich economies, including the United States.
Yet, in a year of elections around the world, politicians are largely
ignoring the problem, unwilling to level with voters about the tax
increases and spending cuts needed to tackle the deluge of borrowing. In
some cases, they’re even making profligate promises that could at the
very least jack up inflation again and could even trigger a new
financial crisis.
The International Monetary Fund last week reiterated its warning that “chronic fiscal deficits” in the US must be “urgently addressed.” Investors have long shared that disquiet about the long-term trajectory
of the US government’s finances.
“(But) continuing deficits and a rising debt burden have (now) made that
more of a medium-term concern,” Roger Hallam, global head of rates at Vanguard, one of the world’s largest asset managers, told CNN.
As debt burdens mount around the world, investors are growing anxious.
In France, political turmoil has exacerbated concerns about the
country’s debt, sending bond yields, or returns demanded by investors, soaring.
The first round of snap elections Sunday suggested that some of the
market’s worst fears might not come to pass. But even without the
specter of an immediate financial crisis, investors are demanding higher
yields to buy the debt of many governments as shortfalls between
spending and taxes balloon.
Mandatory Credit: Photo by JIM LO SCALZO/EPA-EFE/Shutterstock (11728221g)
The Federal Reserve building in Washington, DC, USA, 27 January 2021.
The Federal Reserve meets on 27 January, and is expected to leave
interest rates near zero.
Federal Reserve meets in Washington, DC, USA - 27 Jan 2021
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Markets are adjusting to stubborn inflation. Election noise could spoil
the calm
Higher debt servicing costs mean less money available for crucial public services or for responding to crises such as financial meltdowns,
pandemics or wars.
Since government bond yields are used to price other debt, such as
mortgages, rising yields also mean higher borrowing costs for households
and businesses, which hurt economic growth.
As interest rates rise, private investment falls and governments are
less able to borrow to respond to economic downturns.
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Tackling America’s debt problem will require either tax hikes or cuts to benefits, such as social security and health insurance programs, said
Karen Dynan, former chief economist at the US Treasury and now professor
at the Harvard Kennedy School. “Many (politicians) are not willing to
talk about the hard choices that are going to need to be made. These are
very serious decisions… and they could be very consequential for
people’s lives.”
Kenneth Rogoff, an economics professor at Harvard University, agrees
that the US and other countries will have to make painful adjustments.
Debt is “not free anymore,” he told CNN.
“In the 2010s, a lot of academics, policymakers and central bankers came
to the view that interest rates were just going to be near zero forever
and then they started thinking debt was a free lunch,” he said.
“That was always wrong-headed because you can think of government debt
as holding a flexible-rate mortgage and, if the interest rates go up
sharply, your interest payments go up a lot. And that’s exactly what’s happened all over the world.”
‘Conspiracy of silence’
In the United States, the federal government will spend $892 billion in
the current fiscal year on interest payments — more than it has
earmarked for defense and approaching the budget for Medicare, health
insurance for older people and those with disabilities.
Next year, interest payments will top $1 trillion on national debt of
more than $30 trillion, itself a sum roughly equal to the size of the US economy, according to the Congressional Budget Office, Congress’s fiscal watchdog.
The CBO sees US debt reaching 122% of GDP a mere 10 years from now. And
in 2054, debt is forecast to hit 166% of GDP, slowing economic growth.
So how much debt is too much? Economists don’t think there is a “predetermined level at which bad things happen in markets,” but most reckon that if debt hits 150% or 180% of gross domestic product, that
means “very serious costs for the economy and society more broadly,”
said Dynan.
A statue of Alexander Hamilton is seen outside the U.S. Department of
Treasury building as they joined other government financial institutions
to bail out Silicon Valley Bank's account holders after it collapsed on
March 13, 2023 in Washington, DC. U.S.
RELATED ARTICLE
America’s debt problem is storing up trouble for the rest of the world Despite growing alarm over the federal government’s debt pile, neither
Joe Biden nor Donald Trump, the main 2024 presidential candidates, are promising fiscal discipline ahead of the election.
During the first televised presidential debate last week, hosted by CNN,
each candidate accused the other of making America’s debt situation
worse, either through tax cuts by Trump or additional spending by Biden.
British politicians have also buried their heads in the sand ahead of a
general election Thursday. The Institute for Fiscal Studies, an
influential think tank, has decried a “conspiracy of silence” between
the country’s two main political parties, over the poor state of public finances.
“Regardless of who takes office following the general election, they
will — unless they get lucky — soon face a stark choice,” IFS director Paul Johnson said last week. “Raise taxes by more than they have told us
in their manifestos, or implement cuts to some areas of spending, or
borrow more and be content for debt to rise for longer.”
Countries trying to tackle the debt issue are struggling. In Germany,
ongoing infighting over debt limits has put the country’s three-way
governing coalition under enormous strain. The political standoff could
come to a head this month.
In Kenya, blowback over attempts to address the country’s $80 billion
debt burden has been much worse. Proposed tax hikes have sparked
nationwide protests, which have claimed 39 lives, prompting President
William Ruto to announce last week that he would not sign the proposals
into law.
Enter the scary bond market
But the problem with putting off efforts to rein in debt is that it
leaves governments vulnerable to far more painful disciplining by
financial markets. The United Kingdom offers the most recent example in
a major economy. Former Prime Minister Liz Truss triggered a collapse in
the pound in 2022 when she tried to force through big tax cuts funded by increased borrowing.
This aerial view shows the La Defense business district and the Aillaud
Towers of the Pablo Picasso area of Nanterre, north-west of Paris on
July 11, 2023.
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Markets fear the French far right could trigger a financial crisis
And the threat hasn’t gone away. Take France. The risk of a financial
crisis there became a serious concern virtually overnight after
President Emmanuel Macron called a snap election last month.
Investors were worried voters would elect a parliament of populists bent
on spending more and cutting taxes, further swelling the country’s already-high debt and budget deficit.
Even though this worst-case scenario now looks less likely, what happens
after next Sunday’s second round of voting is far from certain. Yields
on French government bonds have continued creeping up, reaching their
highest level in eight months Tuesday.
Dynan at the Harvard Kennedy School says financial markets can quickly
become unnerved by “political dysfunction” that causes investors to
doubt a government’s willingness to make good on its debt.
“We tend to have a lack of imagination about the scope for things going wrong. If there’s a big event in which the market freaks out about (US)
debt, it’s not going to be something that was on our radar,” she said.
196 comments
Conversation196 Comments
comments include
Troy
1 hour ago
The first step is giving the Democrats a scalpel and telling them to
trim $1T from social programs and giving the Republicans a scalpel and
telling them to trim $1T from defense. The most effective cuts are made
by those who actually care about the system they are cutting from.
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