On March 31, the U.S. government reached a milestone that economists have long feared.
On that date, publicly held U.S. debt totaled $31.265 trillion, while the gross domestic product, or GDP, was $31.216 trillion, meaning the debt/GDP ratio surpassed the 100% mark.
For a worrisome milestone that economists long warned about, it produced yawns in the halls of Congress.
Perhaps it’s because government officials were preoccupied with war in Iran and the resulting surge in energy prices, but with $1 trillion, or about 1/7th of the $7.4 trillion federal budget now devoted to paying the interest on public debt, some continue to sound the alarm.
Specifically, they worry about continual upward pressure on interest rates. The three major credit rating agencies each have downgraded the U.S. financial standing, which could lead investors to lose confidence in the government’s ability to repay loans and demand higher yields on government bonds.
This would make it more expensive for the government — and eventually consumers and businesses — to borrow money.
One executive who isn’t pushing the panic button is Doug Heding, president of the private wealth team at First Business Bank, but he concedes there is cause for worry.
Heding said the real concern is not an immediate default risk, it’s a long-term reduction in fiscal health. In what Heding called a continual feedback loop, growing debt causes interest rates to rise, higher interest rates cause even larger deficits, and larger deficits lead to even more borrowing.
“The downgrades reflect concern about the long-term trajectory (of debt), and if investors demand higher yields, borrowing costs could rise across the economy,” Heding said. “The fear is that it can create a feedback loop.”
Fortunately, Heding said the U.S. benefits from huge structural advantages such as the dollar’s status as the world’s reserve currency. U.S. treasuries remain the primary safe haven asset for the world, and the U.S. mostly borrows in its own currency.
“That creates a structural advantage to us that slows down a lot of the negative impact that you might see,” Heding said. “So, because of all that, the markets tend to focus less on the specific debt ratio and more on whether policymakers appear capable and willing to stabilize the trajectory.”
One suggestion to stabilize that trajectory, made by the nonprofit Committee for a Responsible Federal Budget, is to reduce the size of the annual federal budget deficit, projected by the Congressional Budget Office to be $1.9 trillion in 2026, from the current 5.8% of GDP to a more manageable 3%. This would require a combination of stronger economic growth, tax policy changes and spending restraint.
Heding said stabilizing debt growth while protecting and expanding economic growth, now just 2% per quarter, is going to come through a balanced approach of entitlement reform, tax policy adjustments, controlling health care cost growth, and policies that improve productivity (where AI should help) and labor force participation (now at just 61.8% of eligible workers).
