If you’re worrying about a pending fiscal Armageddon over the country’s debt, it’s time to waste your cortisol spikes on something else.
True, the country hit a couple of seemingly scary milestones this week that no one really wants to brag about: A total debt load of $40 trillion and interest rates spiking to levels not seen in two decades.
Interest rates on the 30-year bond are well above 5%, and those on the 10 year seemingly heading toward the dangerous 5% marker.
On its face, the debt situation appears pretty bad. The US can’t stop spending (neither side, Democrats or Republicans, seem interested in entitlement reform) and buyers of our debt want a higher interest or risk premium “yield” to be compensated for government profligacy.
The higher yields suggests inflation is about to spike as well. Bonds are long term fixed income investments, meaning they get hit hardest when inflation eats away at their principle.
The Iran war is stoking higher gas prices; Trump’s tariff schemes don’t help. As one top bond investor told me “Given what’s going on, (the spike in yield) underestimates” the problem.
The doom and gloom scenario is that the US is facing a debt crisis, one that will spur crippling interest-rate hikes and a massive sell-off in stocks.
But sources tell me that’s unlikely.
For the record, I’m no fan of deficits, particularly ones that run more than 100% of GDP. In theory, there’s only so much capital to go around. The people with the money — foreign investors (a k a the Chinese), hedge funds, US pensions — can’t keep buying our debt forever.
And Uncle Sam now competes with Open AI, Anthropic and every tech company involved in the AI rollout for financing. There are other places to park your money.
Meanwhile, who wants the Chinese to own so much of our debt and have the ability to press the sell button and send rates soaring?
On the other hand, it’s exactly because of AI and those investment options that our economy is humming along. The United States is still an innovator.
Plus I’m not convinced — and neither are my market sources, people like my “Risk and Return” podcast partner Bob Sloan of S3 Partners — that long yields are historically high.
They may be the highest since 2007. But go back a bit further, say to 2002, and both the 10 year and 30 year were trading in the same range.
And yet, the debt at the time was just $6.41 trillion; we basically had a balanced budget. Our debt-to-GDP ratio was half of what it is today, around 57%. So bond yields then weren’t an indicator of economic disaster.
The Chinese could sell all their holdings of US treasuries, but they bought them for a reason: The dollar is still the world’s reserve currency. Selling them would cause massive losses, not just their holdings, but to world-wide markets, hurting Chinese export-driven economy.
The government needs to make smarter choices, that’s certain. In the meantime, though, don’t panic. A $40 trillion debt is nothing to crow about. But at the end of the day, it’s a figure, not a harbinger.
