The U.S. government’s $33-trillion debt is the result of “unsustainable” fiscal policies, the International Monetary Fund (IMF) has warned, and is the “most worrying” among the world’s major economies, IMF research director Pierre-Olivier Gourinchas said in a 3 October press briefing.
“Under unchanged policies, debt dynamics in the U.S. are very unfavorable,” he added. “The perpetuation of current policies entails an unsustainable fiscal path.”
The U.S. fell $1.5 trillion deeper into debt in just the first 11 months of the current fiscal year, according to a Brookings Institution estimate.
The debt, now at 121 percent of U.S. GDP, will continue expanding under current taxing and spending trends, leading to a U.S. default by 2043, according to an analysis by the Penn Wharton School.
Current interest rates, the highest since 2001, will drive government borrowing costs higher and, by 2025, will set a new record for the amount of interest paid on the national debt, Goldman Sachs has projected.
Higher interest rates have pushed more corporations into bankruptcy, with another $2 trillion in U.S. corporate debt due to be repaid next year alone. (See “Big Bankruptcies Shock the Economy” in this issue.)
“Making debt more expensive is an intended consequence of tightening monetary policy to contain inflation,” the IMF noted in a 3 October blog post. “The risk, however, is that borrowers might already be in precarious positions financially and higher interest rates could amplify these fragilities, leading to a surge of defaults.”
As much as 5 percent of U.S. high-yield or “junk” bonds could default this year, compared to 0.7 percent in 2021 during the COVID War, Fitch Ratings estimates.
The country’s business bankruptcies and loan defaults could peak as early as 2024’s first quarter if interest rates remain at current levels or rise again, Charles Schwab said.
TREND FORECAST: In “Corporate Bankruptcies to Reach 13-Year High, Data Indicates,” (23 May 2023), we correctly predicted that business bankruptcies would grow in number. We foresaw corporate failures continuing to mount at a faster pace, especially if the U.S. Federal Reserve continued to raise interest rates, which it has.
With high interest rates remaining for some time and the U.S. and global economy weak, more businesses will need to refinance their loans.
However, banks are becoming more stringent in their lending requirements. Fewer companies will qualify to borrow.
Also, lending by private equity has plunged, as we reported in “Private Equity Capital Dries Up” (3 Oct 2023) and “Hard Times Ahead for Private Lenders, Moody’s Warns” (27 Jun 2023).
That leaves many companies little choice but to return to the already-saturated bond market, where they will face even higher interest rates—plus a risk premium, in many cases—to attract buyers.
Because the range of options for refinancing or new borrowing is shrinking, corporate bankruptcies will continue to increase.
Each one will turn people out of their jobs, reducing the consumer spending that sustains two-thirds or more of the U.S. economy.
Therefore, each new bankruptcy becomes another factor edging the U.S. toward recession.
The continued rise in bankruptcies will be mirrored by household bankruptcies. The failures will push more banks toward insolvency (see “Brace for a Wave of Bank Mergers, Experts Say,” 18 Jul 2023) and push the U.S. economy closer to recession.
Also note Gregory Mannarino’s article in this issue of The Trends Journal: “ENDGAME: War, Expanding Wars, HYPER-DEBT.”