Nov. 24, 2024 –When the US election was called for Donald Trump the night of November 5, the stock market rose but the bond market fell. The yield on 10-year US government bonds increased from 4.3 % to 4.4%, where it remained 10 days later. The long-term rate had been below 4.0 % in September. The combination – stock market up but bond market down – strongly suggests that the news of Trump’s victory was seen as implying higher government budget deficit and debt numbers in the future.
June 19, 2023 — After an interval when little attention was paid to the long-run prognosis for government debt, its sustainability is again front-and-center in the United States, as in many other countries. The reason is not the concocted debt ceiling crisis, which was resolved at the end of May, two days before a looming default. A likely reason is, rather, the big increase in interest rates over the last year.
So long as interest rates, both nominal and real, were historically low — even close to zero in 2021 — it seemed fine for the government to borrow. In particular, short-term real interest rates, that is, nominal interest rates minus expected inflation, were negative. But now that interest payments on the national debt have risen, with more to come, the situation doesn’t look so benign.
January 31, 2023 — The US federal debt hit its legal limit, $31.4 trillion, on Thursday, January 19, 2023. Everyone feels that they have seen this movie before: there is no need for alarm because the politicians will strike a deal at the last moment. But this time, the movie could well end tragically, as a result of the intransigence of Republicans in Congress. It is likely that they will refuse to raise the debt ceiling until after they have driven the car over the cliff. This could mean a once unthinkable default by the US government. Unfortunately, letting them do that may be the best strategy available to President Joe Biden when the time comes.