- The government could be drowning debt over the next few decades, Renaissance Macro said in a recent research report.
- The debt-to-GDP ratio could nearly double to 181% by 2053, per Congressional Budget Office projections.
The US government could be submerged in debt over the next few decades -- something that could lead to a disaster for markets and the economy, according to Renaissance Macro Research.
The research firm pointed to a recent projection from the Congressional Budget Office, which predicted the ratio of federal debt-to-GDP would nearly double from 98% in 2023 to 181% in 2053. In an alternative scenario drafted by the Committee for a Responsible Federal Budget, the debt-to-GDP ratio could soar even higher, notching 222% of GDP by 2053.
Those projections depict the government "drowning in debt," Renaissance Macro analyst Stephen Pavlick said. That could spell trouble for the US given the current macro environment, where interest rates have been raised aggressively to control inflation.
"CBO 30-year projection is bleak," Pavlick said in a note on Friday. "Rising debt + rising interest costs – debt servicing cost disaster."
Fed officials have raised interest rates aggressively over the past year to tame inflation, a move that's raised the cost of borrowing for debt holders. Currently, interest rates are at the highest level since 2001, with the Federal funds rate target being raised to 5.25%-5.5% in July.
Meanwhile, the government's debt servicing costs hit $475 billion in 2022, up 35% from the $352 billion spent to service the national debt in 2021. Debt servicing costs will likely increase to $663 billion this year, the CBO estimated, with total interest payments on the debt potentially mounting to $10.6 trillion over the next 10 years.
Rising debt servicing costs pose trouble for markets and economy. Historically, national debt servicing costs exceeding 14% of national revenue leads to a "prolonged period of austerity," Glenmede said in a previous note, which could weigh on the economy and corporate profits.
Stocks and the economy are already on shaky footing as high rates tighten financial conditions and raise the risk of recession. Though more economists are warming up to the possibility of a soft-landing, the New York Fed has priced in a 67% chance the economy will tip into a downturn by June 2024.