The U.S. Treasury Department is auctioning off more Treasury bonds this week to fund the country’s growing national debt, increasing the supply of bonds while demand wanes, according to experts who spoke to the Daily Caller News Foundation.
The Treasury announced on Oct. 30 that it expects to borrow another $776 billion to fund the government for the last three months of the year, auctioning off Treasury bonds this week to fund it, according to an announcement from the Treasury. The continued deficit spending requires lenders to fund the process, and the U.S. could have trouble doing that as demand for the U.S.’ debt falls while supply rapidly increases, leading to a rise in interest rates to entice buyers and a potential destabilization of the money supply, according to experts who spoke to the DCNF.
“Should the US enter a so-called debt doom loop where higher debt drives up interest costs, which further drives up debt and interest rates — in a vicious cycle — investors could lose confidence in the US bond market, sending yields to unsustainable heights where the US government may be tempted to resort to quantitative easing (‘printing money’) to finance its budget deficit,” Romina Boccia, director of budget and entitlement policy at the Cato Institute, told the DCNF. “This could result in double-digit inflation with more severe downstream effects and the potential to topple the US dollar as the global reserve currency over the longer run.”
The typical way that the federal government funds its debt is through the issuing of Treasury bills, where investors will submit bids to purchase the securities, buying the government’s debt at a discount and with an interest rate, which is then generally sold by the investors in the secondary market, according to Investopedia. The interest rate on the bonds, the quantity that the investors want to buy and the discount rate are determined through the auction and respond to the current demand.
“The rate of federal deficit spending is rapidly exceeding the bond market’s ability to accommodate,” Richard Stern, director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, told the DCNF. “That imbalance of massive Treasury issuance and scarce credit in general is leading to the spike we’ve been seeing among interest rates across the board.”
The price of 10-year Treasury securities reached a recent high of 4.98% on Oct. 19 and has since declined slightly to around 4.67%, according to the Federal Reserve Bank of St. Louis. The last time that the market yield on a 10-year Treasury bill went over 5% was in June 2007, leading up to the Great Recession.
“It’s possible that we could see trouble selling these bonds down the road,” Stern told the DCNF. “However, there is an important issue here: the Constitution requires that federal spending obligations are made, and, of course, the federal government has the ability to tax or print its way as much as it needs.”
Another option to fund the national debt is through quantitative easing (QE), where the central bank buys its own government bonds and securities, increasing the money supply, according to Investopedia. QE is often criticized as “printing money” and that it causes inflation due to it creating more liquidity in the financial system by increasing the money supply, so more money is chasing fewer goods.
“So, this leaves us at a fork in the road. Assuming Congress doesn’t increase taxes, the first option is that federal deficits continue to crowd out private lending to the point of cratering the economy, and then rates would come down and Treasuries would be more valuable,” Stern told the DCNF. “The second option is that the Fed will go back to QE and increase inflation by creating new money to satisfy federal spending, eroding the real purchasing power of federal spending and Treasuries — however, the Fed would simply be the vehicle of demand for Treasuries and would artificially buoy that market.”
The current national debt stands at over $33.6 trillion, with the public holding $26.6 trillion of that while other government agencies hold around $7 trillion, according to the Treasury. The U.S. budget deficit effectively doubled from $1 trillion in fiscal year 2022 to $2 trillion in fiscal year 2023 when actions related to President Joe Biden’s failed student loan debt forgiveness plan are properly accounted for.
The government also faces the task of dealing with unfunded liabilities or obligations that the government has that, under the current system, are not fully funded, such as Medicare or Social Security, according to the American Enterprise Institute (AEI). The ranges vary, but AEI estimates there are $93.1 trillion in unfunded liabilities that the federal government is responsible for, compared to only $11.1 trillion in 2001.
The amount of unfunded liabilities that the government will need to fund could put more pressure on the Treasury to issue bonds or on the Fed to do more QE, as social security will become increasingly costly as the average age of Americans continues to rise, according to the National Academy of Social Insurance. The largest generation, those born between 1946 and 1964, referred to as the “baby boomers,” are increasingly hitting the retirement age as an increasing life expectancy keeps people on social security for longer.
“Excessive peacetime deficits of $2 trillion this past fiscal year, an unsustainable outlook for US debt, revised expectations for higher inflation for longer, the Fed reducing its bond purchases in an attempt to control inflation, coupled with concerns that US institutions are ill-equipped for addressing the rapidly deteriorating fiscal outlook, combine to send US Treasury bond yields to highs not seen since before the Great Recession,” Romina told the DCNF. “Higher bond yields are a direct result of Treasury flooding the market with bonds at a time when demand for them is falling, especially among some of the US’s largest historic bond buyers, including China and Japan.”
The Treasury did not respond to a request to comment from the DCNF. The White House deferred to the Treasury.
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