A Sober Reflection on the National Debt

Imagine running into a movie theater and yelling “fire!” But just as people are starting to panic, you add, “I mean … not yet … but maybe at some unknowable point in the future.”

That’s a fair description of where many of us tracking the U.S. fiscal outlook find ourselves at this moment. For years, I wasn’t an alarmist about the national debt. During the Biden administration, I even criticized those calling for more austere budget policy; I thought that fiscal austerity would do more harm than good.

Our fiscal reality has changed significantly since those days, and so has my stance on public debt. Here’s why:

The basic budget math has worsened as the interest rate on our national debt has climbed closer to the economy’s growth rate. If the compounding debt consistently grows faster than the economy, we risk entering a debt spiral.

Our annual deficits, currently about 6 percent of G.D.P., are way above where history says they should be. We’re not in a recession, but we’re borrowing as though we were.

Politically, neither party shows any interest in addressing the problem. President Trump and Treasury Secretary Scott Bessent, in fact, are aggressively creating the very risks I worry about.

Mr. Trump does so by explicitly trying to manipulate the Federal Reserve to lower the nation’s debt payments.

Mr. Bessent may be even worse, abandoning the steady hand that’s essential for being Treasury Secretary for hedge-fund swagger. He’s flexing on markets — “I am the house now,” he said, referring to the Treasury’s recent purchase of Japanese yen to support the dollar — by daring currency and bond markets to bet against him. They did. The traders quickly waved off his swagger, and bond yields rose.

Read the rest here.

Trump is threatening military intervention against a new target... the Bond Market.

You just can't make this stuff up.

France: Far left presidential candidate calls for suspension of interest on national debt

CHÂTEAUNEUF-SUR-ISÈRE, France — Jean-Luc Mélenchon has a radical idea to help solve France’s financial challenges: “set fire” to a large chunk of its public debt.

The far-left presidential contender would essentially have the European Central Bank agree to waive interest payments on a massive tranche of French bonds.

Coming from a top presidential hopeful, the proposal has triggered a flurry of criticism from leading economists and politicians, who have denounced it as irresponsible and dangerous for the economic stability of the country and the entire European Union.

Read the rest here.

The US national debt now stands at $40 trillion

Government debt has eclipsed $40 trillion, passing yet another staggering benchmark for red ink, according to the Treasury Department.

The total U.S. IOU hit $40.05 trillion as of Tuesday, some four and a half years after topping $30 trillion. Years of escalating budget deficits, pushed higher by stimulus funding during the Covid pandemic, have seen the public share of the debt near 100%.

In the most recent monthly accounting of U.S. finances, Treasury reported a $432.3 billion deficit in July, the highest monthly total since March 2021. The year-to-date shortfall is nearing $1.8 trillion, higher than the same period a year ago.

Ten years ago, the debt level was at $19.4 trillion.

Read the rest here.

US sells 30-year bonds at highest borrowing costs since 2001

The U.S. government on Thursday auctioned $25B in 30-year Treasury bonds (US30Y) at a yield of 5.216%, marking the highest rate for this tenor since 2001.

This quarter-century high underscores investors' growing demand for increased compensation to finance the nation's expanding fiscal deficit.

While the auction met with decent demand, there were clear signs of slight hesitation from buyers. The bid-to-cover ratio slipped to 2.39 from July’s 2.44, tracking below the recent average. Additionally, indirect bidding dropped to 66.9% from a near-record 77.7% in July. The final yield also landed slightly above prevailing pre-auction market levels, indicating that overall demand narrowly lagged expectations.

This comes a day after a 10-year Treasury (US10Y) auction that drew its highest financing costs since 2007.

The broader surge in long-term yields is heavily driven by investor anxiety that rising energy prices, fueled by conflict in the Middle East, will sustain inflation and force the Federal Reserve to keep interest rates elevated.

Meanwhile, 30-year yields (US10Y) dipped by roughly five basis points to 5.21% at press time, as cooling oil prices and tame producer price data prompted traders to scale back expectations for another Fed rate hike this year. Still, that's up from 4.85% at the start of the year.

Read the rest here.

Russia Halts Bond Auctions

Russia's Finance Ministry has suspended federal government bond auctions indefinitely as borrowing costs climb and investor demand weakens, complicating efforts to finance a widening wartime budget deficit.

The ministry said on Monday it was halting its regular weekly auctions of government bonds, known as OFZs, "to facilitate the stabilization of market conditions." It did not say when sales would resume, saying only that it would announce their restart at a later date.

OFZs are ruble-denominated government bonds that underpin Russia's financial system. They are the government's primary source of domestic borrowing to cover budget deficits, while banks hold them to manage daily cash needs and foreign investors buy them for returns.

The Finance Ministry has relied heavily on domestic borrowing to help finance a budget deficit that reached 5.7 trillion rubles ($72.39 billion) at the end of June, while military spending continues to outpace initial government plans.

Prices of OFZs have fallen sharply since mid-June. The RGBI government bond index has dropped from around 119 points to about 110, its lowest level this year, while yields on bonds with maturities longer than 10 years have climbed above 16.5%.

Read the rest here.

See also... Could Russia's Wartime Debt Boom Trigger a Banking Crisis?

Jamie Dimon warns of ‘some kind of bond crisis’

CEO Jamie Dimon on Tuesday warned that rising government debt levels could trigger a crisis in the bond market, urging policymakers to act before markets force their hand.

Dimon’s statement was in response to a question about whether he was worried about rising levels of government debt “around the world and in your country.”

“The way it’s going now, there will be some kind of bond crisis, and then we’ll have to deal with it,” Dimon said at an investment conference held by Norway’s sovereign wealth fund, the largest in the world.

“I’m not that worried we’ll be able to deal with it,” Dimon said. “I just think maturity should say you should deal with it, as opposed to let it happen.”

Dimon, who runs the world’s largest bank by market cap, said history has shown that today’s growing mix of risks could combine in unpredictable ways. While the timing is uncertain, failing to address those pressures increases the odds that adjustment comes after upheaval rather than deliberate policy moves.

Read the rest here.

The federal debt is a stealth tax on every American

In response to concerns about affordability, President Trump proposed capping interest rates on credit cards at 10 percent. But the federal government’s own credit card — the national debt — is already making life less affordable for all Americans. 

U.S. consumers paid $160 billion in credit card interest in 2024, averaging just under $1,200 per household. That’s a lot of money, but it’s only one-sixth as much as the $1.028 trillion we paid in net interest on the federal debt in fiscal 2025. 

At $7,600 per household, interest on the federal government’s debt costs more than the average household spent on retirement contributions ($1,991), gas ($2,411), healthcare ($6,197) or groceries ($6,224) in 2024. Even as housing costs have surged, federal borrowing is costing Americans the equivalent of three and a half months of mortgage or rent payments.

One might argue that Americans aren’t really paying $7,600 per household in interest each year, because taxes haven’t risen to cover those costs. That is true — for now — because the federal government is adding its interest costs to the debt, the fiscal equivalent of not even making the minimum credit card payment. 

But Americans are already paying higher interest rates on everything from home mortgages to small business loans to credit cards, because, as the Congressional Budget Office has explained, when federal borrowing increases, “the amount of funds available for private investment would decline (a phenomenon known as crowding out), and interest costs would increase.”   

Read the rest here.

What is going on in the financial markets?

Ray Dalio warns that the monetary order is breaking down, leaving us with a terrible choice: ‘Do you print money or let a debt crisis happen?

The looming debt crisis

Gold tops $5,000 for the first time in 'breathtaking and profoundly scary' rally

Just as a quick historical note; the last time the US had a financial panic that did not center on the stock market, was way back in 1893. And it was U G L Y. 

Moody's Downgrades US Credit Rating

Moody’s Ratings slashed the United State’s credit rating down a notch to Aa1 from the highest triple A on Friday, citing the budgetary burden the government faces amid high interest rates.

“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” the ratings agency said in a statement.

The U.S. is running a massive budget deficit as interest costs for Treasury debt continued to rise due to a combination of higher interest rates and more debt to finance. The fiscal deficit totaled $1.05 trillion year to date, 13% higher than a year ago. The influx in tariffs helped shave some of the imbalance last month, however.

Moody’s had been a holdout in keeping U.S. sovereign debt at the highest credit rating possible, and brings the 116-year-old agency into line with its rivals. Standard & Poor’s downgraded the U.S. to AA+ from AAA in August 2011, and Fitch Ratings also cut the U.S. rating to AA+ from AAA, in August 2023.

Read the rest here.

Long overdue.

Various...

‘Amateur hour’: Washington aghast at Trump administration’s war plan group chat

America’s rich scramble to open Swiss bank accounts over Trump fears

Trump says countries that purchase oil from Venezuela will pay 25% tariff on any trade with U.S.

Americans Are Buying an Escape Plan

That Portrait (I'm  not seeing the big deal. I saw it and it looks pretty good to me.)

US could default on debt as soon as July

Erdoğan seizes geopolitical moment to snuff out democratic opposition

Tesla Sales in Europe Crater

Paul Tudor Jones sees fast approaching reckoning over US debt levels

Billionaire hedge fund manager Paul Tudor Jones is raising alarms about the U.S. government’s current fiscal deficit and the increased spending promised by both presidential candidates, saying the bond market may force the government’s hand after the election in addressing it. 

“We are going to be broke really quickly unless we get serious about dealing with our spending issues,” Jones told CNBC’s Andrew Ross Sorkin on Tuesday.

Read the rest here.

I tend to agree. No matter who wins, their spending plans are going to spike the national debt. Trump's are worse, by far. But the next four years, and possibly beyond, are going to be a bumpy ride. A quarter century of bipartisan fiscal profligacy may finally be reaching its inevitable end. 

Ray Dalio is worried about the US debt

Soaring U.S. government debt is reaching a point where it will begin creating larger problems, Bridgewater Associates founder Ray Dalio said Friday.

The hedge fund titan warned during a CNBC appearance that the need to borrow more and more to cover deficits will exacerbate the political and social problems the country is facing.

“Economically strong means financially strong,” Dalio said on “Squawk Box.” “Financially strong means: do you earn more than you spend? Do you have a good income statement as a country? And do we have a good balance sheet?”

The U.S. is $33.7 trillion in debt, a total that exploded by 45% since the Covid pandemic in early 2020, according to Treasury Department data. Of that total, $26.7 trillion is owed by the public. Last year, the government rang up a $1.7 trillion deficit as it sought to keep up the pace of spending.

As the debt built up and the Federal Reserve raised interest rates to try to tamp down inflation, the government spent $659 billion on net interest costs in fiscal 2023 to finance the debt.

Dalio said that is a recipe for trouble.

“The worse that gets, the more we are going to have that long-term problem,” he said. “You can see it in the numbers. It’s just a matter of numbers. We are near that inflection point.”

Along with the basic budget issues, Dalio also cautioned that foreign buyers, who make up about 40% of demand for U.S. Treasurys, have been backing off, creating a supply-demand problem.

Read the rest here.

US Credit Rating Downgraded

WASHINGTON (AP) — Fitch Ratings has downgraded the United States government’s credit rating, citing rising debt at the federal, state, and local levels and a “steady deterioration in standards of governance” over the past two decades.

The rating was cut Tuesday one notch to AA+ from AAA, the highest possible rating. The new rating is still well into investment grade.

The decision illustrates one way that growing political polarization and repeated Washington standoffs over spending and taxes could end up costing U.S. taxpayers. A lower credit rating, over time, could raise borrowing costs for the U.S. government.

It’s only the second time in the nation’s history that its credit rating has been cut. In 2011, the ratings agency Standard & Poor’s stripped the U.S. of its prize AAA rating after a prolonged fight over the government’s borrowing limit. The Government Accountability Office, in a 2012 report, estimated that the 2011 budget standoff raised Treasury’s borrowing costs by $1.3 billion that year.

Read the rest here.

The Economic Consequences of Putin's War

The big western brands showed Vladimir Putin how to do it. While the Kremlin’s army was getting bogged down in Ukraine, Coca-Cola and Starbucks lost no time in closing their doors to Russian customers.

But the most emblematic move of all came from McDonald’s, which has shut all 850 of its outlets in Russia. The availability of Big Macs in the Soviet Union was seen in 1990 as evidence that the west’s old cold war foe was turning its back on communism, but the past fortnight has rekindled memories of the bad old days. There were queues outside McDonald’s when it first opened in Moscow. Last week, Russians queued for one last burger before the pull-out began.

One of Putin’s predecessors in the Kremlin – Lenin – once said there were decades when nothing happens and weeks when decades happen, and that’s true of the period since Russian troops moved across the border into Ukraine on 24 February.

It is not just that Russia faces a brutal recession. It is the shattering of the idea of a seamless post-cold-war global economy. It is the return to days of higher defence spending in the west. It is the possibility that governments may backpedal on their net zero carbon pledges.

“Putin has created his own worst nightmare,” says Mohamed El-Erian, chief economist at Allianz and president of Queens’ College, Cambridge. “He has united the west in a way it hasn’t been for a long time; he has been the catalyst for arms to Ukraine on a large scale; he has changed Germany’s approach to military spending; and he has brought the Russian economy to its knees. It is incredible.”

Freezing the bulk of Russia’s reserves has meant the central bank has struggled to shore up the rouble, which has plummeted by a third on the currency markets. Capital controls have been introduced, interest rates have more than doubled, and annual inflation is heading for 20%. The stock market has been closed and financial markets fear Moscow may default on a sovereign debt repayment later this week.

Read the rest here.

New York Hedge Fund Seizes Argentine Naval Ship

The Libertad, a three-mast tall ship with 330 navy cadets and crew aboard, was seized at Tema, an industrial port east of Ghana’s capital, Accra, on Oct. 2 through a court order obtained by N.M.L. Capital, a holdout creditor from Argentina’s default a decade ago that says it is owed more than $370 million. The creditor is among a few remaining holdouts to refuse debt restructuring agreements in 2005 and 2010. It had tracked the vessel through the Libertad’s Web site.

N.M.L., a subsidiary of Elliot Capital, a New York-based hedge fund with $20 billion under management, offered to release the ship if Argentina paid a $20 million security. It also offered to bear the costs of flying the sailors home.

Argentina’s foreign minister, Héctor Timerman, said in a statement, “The vulture funds have crossed a boundary in their attacks on the Argentine republic.” He said the seizure violated the Vienna Convention, which grants military vessels diplomatic immunity.

Read the rest here.

Niall Ferguson: Fiscal Crises and Imperial Collapses: Historical Perspective on Current Predicaments

I had posted a link to this lecture earlier but I just found a copy of the video that can be embedded.  This is an outstanding lecture on how countries get too heavily indebted and then suffer a ruinous financial collapse.  If you want to understand what is going on now in Europe, and what is almost certainly going to happen here in the coming years, watch this lecture.  I suggest starting at around the 8 minute mark to skip the introductions.