As president-elect Donald Trump prepares to enter the White House in January 2025, policy and cabinet positions have slowly started to take shape for his second term in office.
Yet one piece of the States’ future seemed set in stone long before the next president was elected: US debt would rise. Under Trump, debt is expected to grow by more than £7.5bn. As of October, it had ballooned to over $35.85trn (£28.35trn), and in the past decade, US debt has grown by almost $18trn.
While mounting US debt has been a perennial topic of discussion, there has been little in the way of consequences so far. The country hit its debt ceiling in January 2023, and in June of that year, lawmakers opted to suspend the debt ceiling until January 2025. Raising or suspending the ceiling is far from an uncommon practice for the US government: since 1960, it has been increased 78 times.
Gradually, and then all at once
How long this trend can continue, and when consequences will arise, is unclear to most investors. Some believe the timeline could be around a decade. Rob Perrone, investment counsellor at Orbis Investments, says this is the nature of how debt issues occur on most scales: gradually, and then all at once.
“The way governments get into debt trouble is similar to bankruptcy,” he explains. “How do you go bankrupt? Gradually, then suddenly. Nobody rings a bell when you start to get into debt trouble, it builds up, and then things start to fall apart.”
By the end of the fiscal year 2023, the US-debt-to-GDP ratio was 97%, according to the Bureau of the Fiscal Service. It is now estimated to be around 100%, projected to grow to 120%. Perrone says the issue lies in how debt can spiral. This happens as governments issue additional bonds to “plug the gap” of the debt, but it grows as interest rates come into play.
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“At the moment, the US government is paying 3.3% interest service cost on the debt they have already. The entire treasury curve is above that. So, whatever they’re issuing – five- , 10-, or 30-year debt – just to roll over the existing stock of debt is going to attract a higher interest rate,” Perrone adds.
“You have the debt pile getting bigger and the interest rate on new debt is higher than the rate on old debt. The US is already in a position where net interest on the debt is consuming more than the entire defence budget. It’s already bigger than the primary deficits they’re running on actual spending, and it’s projected to get worse.
“As a result, debt power gets worse which means the interest expense gets higher. Interest expense chews up more of the budget, which makes it even harder to balance the book, so your deficits get worse. This means you have to issue more bonds, issue more debt, and now your debt gets worse, and so on.”
This year, debt interest alone is estimated to be 3% of the US GDP. According to research by Pictet, interest deficits will make up over 60% of the federal debt by 2028.
Read the rest of this article in the December issue of Portfolio Adviser magazine
