I’m not even gonna say anything, but just let this sit here and marinate.
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The warnings about potential debt hazards come as the total federal debt outstanding has surged to $22.5 trillion, or about 106% of GDP. Excluding intragovernmental obligations, debt held by the public is $16.7 trillion, or 78% of GDP.
That latter total, considered to be more relevant as an economic burden, is likely to rise to 105% by 2028, according to Congressional Budget Office projections. However, the CBO notes that the numbers are subject to revision depending on how government policies play out.
Advocates for fiscal reform argue that the debt impact has indeed reached the point where action is necessary.
“Globally, we have become over-reliant on borrowing as a solution for everything. Political excuses abound for why it doesn’t matter, which just clearly isn’t the case,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan committee of legislators, business leaders and economists that counts former Federal Reserve chairs Paul Volcker and Janet Yellen among its members.
“We are quickly approaching a situation where we have dug ourselves a debt hole which is doing to have profoundly negative effects on the economy for probably decades going forward,” MacGuineas added.
In its calculations, AB Bernstein pulls in debt from a variety of sources and compares it to GDP as follows:
100% of GDP using federal, state and local government debt combined.
150% for households and firms
450% for financial debt, which carries “conceptual issues and risks,” namely that debt held by financial firms often represents potential in a worst-case scenario involving various derivative instruments that can carry high notional levels that are unlikely ever to be realized.
27% in trusts for social insurance programs.
484%, which values all the promises from current social insurance programs.
633%, which tallies up an “infinite horizon” of obligations for social programs, rather than just the traditional 75 years used in computations.
Timing is everything
That total gets the debt load around the 2,000% mark, though Carlsson-Szlezak points out that different debt carries different risks.
“A default on U.S. treasury bonds would be catastrophic to the global economy – whereas changes in policy (while painful for those whose future benefits were diminished) would barely register on the economic horizon,” he wrote.
Impacts on individual parts of the economy would vary.
Moody’s Investors Service recently warned that an already growing number of junk-rated companies could “swell dramatically” in the next downturn, “substantially increasing default risk.”
“In the next credit cycle downturn, then, the generally lower credit quality of today’s speculative-grade population means that the default count could exceed the Great Recession peak of 14% of all rated issuers,” Christina Padgett, a Moody’s senior vice president, said in a statement.
Currently, though, credit default rates remain low as economic conditions prove favorable.
Similarly, on a macro level recession fears have proven unwarranted so far as growth continues albeit at a slower pace than in 2018. McGuineas of the CRFB said that now is the time then, for the country to start doing something about the debt situation.
“First, you start having politicians level with voters instead of promising freebies. Second, you recognize that the time to do that is when your economy is strong,” she said. “When people were arguing for more borrowing they should have been doing the reverse. We’re still not in recession. It’s time to put in long-term strategies.”