WHAT YOU NEED TO KNOW
The US debt is near its highest level in history and on track to grow. Neither political party currently seems intent on making it more sustainable. What risks does that present for the US economy and for investors? How can the debt issue be solved and what does that mean for investment portfolios?
Executive Summary
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The national debt has reemerged as a major market concern. While the trajectory has appeared unsustainable for quite some time, higher interest rates and a rising interest burden have brought it to the fore, prompting questions of whether it will precipitate a crisis in the medium term.
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We recognize the risks to the economy and the market but are not alarmists. We believe there are still solutions and time to address the underlying issues surrounding the national debt.
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We foresee a combination of factors putting the debt on a sustainable path—a mix of productivity growth, moderate inflation, spending cuts, and tax hikes should be enough to avoid a major crisis.
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Yet it may still require a mini-crisis in the bond markets—similar to the early 1990s in the US or 2022 in the UK—to spur Congress into action.
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Because the US issues its own currency, it does not face the same budgetary constraints as a household or firm would. However, it is still hemmed in by inflation and potential political repercussions.
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The US enjoys an “exorbitant privilege” as the global reserve currency and preferred destination for international savings. This gives its policymakers more flexibility than other countries would have when it comes to managing debt.
“The federal government is on an unsustainable long-term fiscal path that poses serious economic, national security, and social challenges if not addressed. And the longer we wait to act, the more dire the consequences will be on the economy and the public.”
—Government Accountability Office (GAO), a nonpartisan federal agency that serves as the country’s chief auditor, February 2024
