The outstanding U.S. national debt reached a staggering $35 trillion on Friday as it continues its stratospheric run at a blistering pace. We’ve added $1 trillion during the seven months of 2024 alone and witnessed a 50% rise since January 2020. The rapid increase is attributed to various factors, including projects aimed at changing the energy infrastructure, stimulus programs to offset economic hardships during the pandemic, unchecked deficit spending, and rising interest rates.
The debt-to-GDP ratio, a critical measure of the debt burden relative to the economy’s size, has also seen concerning trends. Although the current-dollar GDP grew by 31% since January 2020, the debt grew by 50% over the same period, causing the debt-to-GDP ratio to spike from 106% at the end of 2019 to 133% in Q2 2020. It has since dipped slightly to 121.7% in Q2 2024 due to a temporary surge in tax receipts.
The Impact on Treasury Funding
The rapid increase in national debt has significant implications for Treasury funding. The Treasury has been issuing a large volume of Treasury bills (T-bills) to manage the debt, which has led to T-bills accounting for 20.7% of the Treasury securities held by the public. This strategy aims to take upward pressure off longer-term yields, but it has raised concerns about the sustainability of relying heavily on short-term debt. Experts argue that this approach, termed “activist Treasury issuance,” could interfere with the Federal Reserve’s efforts to control inflation and may lead to a rerun of the 2019 repo crisis.
The Cost of Debt Servicing
Interest payments on the national debt are a growing concern. The Congressional Budget Office (CBO) projects that interest expenses will reach $12 trillion over the next decade, making it the fastest-growing category of federal spending. For the first time, interest costs are expected to exceed defense spending in the current fiscal year. This trend underscores the increasing burden of debt servicing on the federal budget, which will limit the government’s ability to fund other essential programs and services.
What Is the U.S. Treasury Secretary’s Focus?
On Saturday, after the debt hit $35 trillion, U.S. Treasury Secretary Janet Yellen spoke in Belém, Brazil, after meeting with G20 finance ministers. She stated that $3 trillion in new capital is required each year to combat climate change and deemed the global transition to a low-carbon economy “the single greatest opportunity of the 21st century.” Yellen emphasized the need for stronger climate finance policies through 2050 to address the “existential threat” to communities and the economic strain posed by climate change.
Key Takeaway
The explosive growth of the U.S. national debt to $35 trillion has profound implications for Treasury funding and the federal budget. The reliance on short-term debt instruments like T-bills raises concerns about market stability and the effectiveness of monetary policy. Additionally, the increasing burden of interest payments on the national debt highlights the urgent need for fiscal reforms to ensure long-term economic stability.
