In the wake of the latest update from the Congressional Budget Office (CBO), which shows a marked escalation in how far and fast the US debt will grow, there are growing warnings that it is sowing the seeds of another crisis financial.
of Financial Times (FT) published a lead article last week that cited analysts who said the Treasury’s growing turn to the short-term bond market — one-year Treasury bills as opposed to 10 years — to finance debt can cause problems.
He quoted Jay Barry, co-head of interest rate strategy at JPMorgan, who said the stock of outstanding short-term debt will rise from $5.7 trillion to $6.2 trillion by the end of this year to reach a level more all time high.
Torsten Slok, chief economist at financial firm Apollo, who is regarded as an astute observer of the financial system, warned that this could cause a disruption.
“It is likely that the share of Treasury bonds as a share of total debt will increase, which raises the question of who will buy them.” That could absolutely strain the funding markets,” he said.
As the FT article noted, the size of the Treasury market (now at more than $26 trillion) has quintupled since the 2008 financial crisis, as an “indication of how much the US has returned to debt financing over 15 years the last”.
Auctions of longer-dated Treasuries have been at record levels in the recent period, and “questions about who will buy all the debt on offer have plagued economists and analysts for months.”
Global head of research at Barclays bank Ajay Rajadhyaksha told the FT: “We’re spending money like a drunken sailor ashore for a weekend.”
Treasury market liquidity problems are being compounded by the withdrawal of the Federal Reserve as a buyer of bonds due to its efforts to reduce the stock of debt stock created during the period of quantitative easing – so-called quantitative easing.
There is a risk that the lack of liquidity could cause problems in the overnight repurchase (repo) market, in which interest rates, normally a fraction of a percentage point, went as high as 10 percent in September 2019, prompting the Fed to intervene.
Rajadhyaksha warned that the US could experience “a September 2019 moment” again.
And given the acceleration of debt levels since then, it could be something even more serious.
What was important about the CBO update was not just the amounts involved, but the rate at which the debt level is rising.
In its report last week, the CBO said the budget deficit for 2024 was $400 billion (27 percent) larger than projected in February and “the cumulative deficit over the period 2025-2034 is $2.1 trillion larger (10 percent).
Not only are the amounts important, but so is their relationship to US gross domestic product (GDP). The CBO projected that the debt would rise from nearly 100 percent of GDP this year to 122 percent over the next decade, surpassing the 106 percent it reached in 1946 at the end of World War II.
During the following years, the US was able to reduce its debt due to the post-war boom and the great expansion of American industry. This is not a prospect today, because the US is no longer an industrial power, but the world center of financial speculation and parasitism.
The events at Boeing show the relationship between the two. Once the epitome of American industrial power, its planes are becoming too dangerous to fly due to the promotion of shareholder value through stock buybacks and other schemes in the interests of the financial oligarchy at the expense of safety.
And there is little prospect for sustained growth in the US economy in the longer term. CBO projected that the growth rate for 2024 and 2025 would be lower than in 2023 and for the years 2026-2034 would average just 1.8 percent per year, well below levels achieved in the past.
What growth there is, and the increase in government revenue it brings, will increasingly be swallowed up by military spending.
In explaining the reasons for the sharp increase in the debt, CBO said: “The largest contributor to the cumulative increase was the inclusion of recently enacted legislation…which added $1.6 trillion to projected deficits.
“This legislation included additional emergency appropriations that provided $95 billion in aid to Ukraine and countries in the Indo-Pacific region.”
The CBO did not specifically indicate where the spending cuts would be made to pay the rising military bill, but it did identify the target — social spending.
“The aging population causes the number of Social Security and Medicare beneficiaries to grow faster than the general population. In addition, federal costs per beneficiary for major health care programs continue to grow faster than GDP per person. As a result of these two trends, Social Security and Medicare spending increase relative to GDP from 2024 to 2034.
In addition to immediate concerns about turbulence in financial markets, warnings have been issued about the implications of rising debt for the US’s position as the dominant capitalist power and whether it will affect the dollar’s status as a world currency that enables the US to raise debt in a way that is not possible for any other country.
In an interview with the FT in May, Ray Dalio, the multi-billionaire founder of hedge fund giant Bridgewater, said he was concerned whether continued US military involvement would deter foreign investors from buying US bonds.
He was worried about Treasuries because of high debt levels and sanctions such as those imposed on Russia after its invasion of Ukraine when $300 billion of its foreign assets were frozen by the US and European powers.
If sanctions were imposed on other countries, it could reduce international demand for US Treasuries. Any move in this direction – there are already signs of it as China has begun to reduce its holdings of US debt – would affect the status of the dollar.
He also expressed concern about the state of American politics, characterizing the current situation as leading to what he called a “civil war.” That did not necessarily mean a situation in which people “grab their guns and start shooting” although he said such a scenario was possible.
The increase in debt has also set off alarm bells Wall Street Journal, one of the leading voices of American imperialism. Writer and longtime editorial executive Gerald Seib wrote an essay published Saturday titled “Will Debt Sink the American Empire?”
He said America was drifting into “an uncharted sea of ​​federal debt,” noting that history offered some “cautionary notes about the consequences of swimming in debt.”
“Throughout the centuries and around the globe, nations and empires that amassed debt boldly have sooner or later met with unhappy ends.”
He cited warnings that even if a country had the main reserve currency and was the leading geopolitical power it was not necessarily spared, and a withdrawal by China and other Asian countries from US Treasury debt could trigger a fiscal crisis. and economic.
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