https://www.wsj.com/finance/investing/wall-streets-latest-obsession-is-an-unknowable-number-f67248de
Fitch’s downgrade of US debt wasn’t a mistake — it was long overdue by Vivekanand Jayakumar, The Hill – August 7, 2023
https://thehill.com/opinion/finance/4138215-fitchs-downgrade-wasnt-a-mistake-it-was-long-overdue/
Much-needed, bipartisan reforms to American welfare programs are unlikely in the current political environment, as is the needed overhaul of the overly-complicated tax system. Barring a fiscal crisis, the proverbial can will just keep getting kicked down the road.
A country can fall into a debt trap when its debt-to-GDP ratio rises persistently and reaches a level high enough to generate concerns about the government’s ability to refinance its debt. Large, persistent primary deficits (deficits excluding net outlays for interest) have been the primary driver of the growth in the U.S. debt-to-GDP ratio.
The absence of a bipartisan consensus on raising tax revenue and curtailing spending on popular but costly social insurance and welfare programs suggests that there will be no primary surplus any time soon. In fact, the aging of the population and the growing strategic competition with China and Russia suggest that budgetary outlays for Social Security, Medicare and national defense will only continue to climb in coming decades.
Until recently, interest payments on existing debt were relatively small. But we may be entering an era where rates remain elevated. CBO is conservatively projecting a doubling of annual net interest costs for the U.S. government over the coming decade.
Long-term debt sustainability crucially depends on whether the cost of refinancing the debt is persistently above or below the economic growth rate. In the aftermath of World War II, the U.S. relied on a combination of interest rate distortions (including financial repression), primary surpluses and relatively rapid economic growth to reduce its debt burden.
Given unfavorable demographics and subpar productivity growth, it is hard to imagine the U.S. replicating the 1948-1973 boom. CBO projects an annual real potential GDP growth rate of just 1.8 percent between 2023 and 2033.
In the absence of primary surpluses and rapid real economic growth, bond investors should be wary of interest rate distortion. They will seek an additional term premium on long-dated treasurys.