Every day, including weekends, more than $3 billion is spent on the interest owed on the national debt.
Reductions in interest rates by the Federal Reserve will not just provide relief to households and businesses facing difficulties in managing increased borrowing expenses.
The U.S. Treasury would also experience some relief from the increasing costs of borrowing due to government spending surpassing revenue, which contributes to the growing national debt.
Anticipated decreases in interest rates may provide some assistance, however, the fundamental issue of a significant government debt burden that appears likely to increase in the future will not be resolved.
The anticipated Federal Reserve interest rate reductions are expected to occur in September. Certain investors are concerned that this could indicate an approaching economic downturn.
However, should we actually be worried? We will examine economic indicators to determine if these reductions are a sign of impending trouble.
Additionally, the ability to fund this debt will depend on the unpredictable decisions of investors worldwide who purchase and exchange U.S. assets. Debt in the Treasury market is approximately $28 trillion.
In an interview, Sid Vaidya, chief investment strategist at TD Wealth, emphasized the importance of monitoring the level of debt in the economy.
He mentioned that if the Fed changes its monetary policy to lower interest rates through rate cuts, it could reduce the government’s interest expenses. He also stated that this change would benefit others by causing interest rates to decrease over a period of 18-24 months.
“The relief would only be minor,” stated Roger Hallam, Vanguard’s global head of rates, referring to the government’s debt situation.
The reason for this is that reducing interest rates will not impact the U.S. Taxation and spending policies, a major factor contributing to the deficit, are still significant at 6.7% of the U.S. The Center on Budget and Policy Priorities, a nonpartisan think tank, has calculated the gross domestic product.
Who wants U.S. debt?
Recently, investors have not been paying as much attention to the increasing U.S. debt caused by the pandemic as they were in October.
In the past, the 10-year Treasury yield unexpectedly rose to 5%, its highest level in 16 years, causing concern among investors and sparking worries about the direction of U.S. debt. This summer, investors eagerly purchased new U.S. stocks.
Treasury securities without a hitch.
This has helped the U.S. government as it has raised its debt to over $35 trillion in August, compared to about $32.8 trillion the previous year.
Steve Foresti, a senior investment advisor at Wilshire Advisors, explained that this pattern will persist until it reaches a sudden halt.
The government’s borrowing during the global financial crisis of 2007-2008 and the 2020 pandemic was seen as beneficial in supporting financial markets and the economy.
Foresti said that despite the U.S. managing to avoid recession, the ongoing deficit spending raises concerns about the effectiveness of future policy tools during the next crisis.
Foresti expressed concern about the potential consequences if this continues to grow endlessly.
Given this context, he has been advising clients to diversify their equity and bond portfolios by adding a mix of assets that can potentially counteract the effects of inflation in the long run.
Some examples could be gold, real estate, SP500, and other valuable assets, as well as TIPS or Treasury securities tied to inflation, according to him. He noted that reducing expenses has not been a significant priority for either of the candidates vying for the presidency in November.
Interest costs $3 billion each day
Torsten Slok, the chief economist at Apollo Global Management, stated that the average monthly interest costs of the U.S. government have increased to over $3 billion per day, including weekends, due to rising debt levels and higher interest rates. This is a significant jump from the pre-pandemic level of about $1 billion per day.
“Slok stated to MarketWatch that reductions in interest rates will be beneficial.”
He stated that the debt levels are only increasing, with no sign of decreasing in the foreseeable future.
Reducing the federal interest rates will not resolve this issue.
Recently, the U.S. Treasury has been focusing on borrowing shorter-term debt, particularly T-bills. However, there has been some relief in auctions of longer-term debt as yields have dropped back to the lows seen earlier this year.
The 10-year bond yield has decreased to less than 4% due in part to expectations of cuts in interest rates by the Federal Reserve.
In his speech at the annual Jackson Hole economic symposium, Federal Reserve Chair Jerome Powell emphasized the need for decreased interest rates.
Vaidya at TD Wealth mentioned that it is advantageous for the government if yields decrease.
When the music stops
Former Kansas City Fed President Thomas Hoenig anticipates difficulties when it comes to managing the financing of the U.S. debt.
He explained to MarketWatch that the government needs to secure $2 trillion in funding for new debt this year. This includes refinancing a third of their existing debt and acquiring new debt, which must be obtained from a source.
Foreign buyers are less enthusiastic than they used to be. He stated that the only remaining aspect is related to domestic affairs or the Federal Reserve. “And I am not at ease with that.”
Hoenig, who is against government intervention and the Fed supporting financial markets, expressed his desire for discussions to be happening in private that could lead to Congress addressing its fiscal issues.
Hoenig stated that the Federal Reserve must be prepared to acknowledge that it cannot fully finance all the debt. He emphasized that although monetary policy and fiscal support were necessary during the COVID crisis, not every expenditure can be funded.
