Rising costs of debt service in the US are projected to reach unprecedented levels, signaling potential financial distress known as a 'doom loop' in the bond markets.
The cost of servicing debt in the United States is expected to escalate to unprecedented heights over the next decade, exerting increasing pressure on public finances and resurrecting fears of a 'doom loop' scenario in bond markets, where high interest payments lead to more borrowing. This alarming trend is based on the latest estimates from the Congressional Budget Office, covered by Bloomberg, which reveal a sharply rising trajectory for interest payments relative to both the economy's size and the total deficit.
The new standard projections for US borrowing indicate that net interest payments by the Treasury are likely to soar from $1 trillion this year to $2.1 trillion by 2036, representing approximately 4.6% of GDP by that time. This forecast substantially exceeds the 3% of GDP target set by Treasury Secretary Scott Pessen aiming to reduce the deficit by the end of President Donald Trump's administration in January 2029. This increase, indicated in the projections, underscores the unsustainable nature of current fiscal policies if significant changes are not enacted.
The projected 4.6% will constitute the majority of the federal budget, potentially diverting funds from vital programs and services, with broader implications for the economy, including higher borrowing costs, reduced public investment, and overall economic stagnation. The financial cycle's potential self-reinforcement could lead to a severe fiscal crisis unless appropriate measures are taken to rein in spending and improve revenue generation.
