(Bloomberg) — When the US borrows money, it needs to pay its loans back with interest—just like any other borrower. But America’s national debt is currently $34 trillion and rising. Soon, the US will need to spend more each year paying interest than what it spends on national defense.
In the last few weeks, former Treasury Secretary Robert Rubin told Bloomberg TV that the US economy is “in a terrible place,” and Black Swan author Nassim Nicholas Taleb warned that “a debt spiral is like a death spiral.”
“It’s a slow spiral, but it’s still a spiral—of rising debt and rising payments on the debt,” Phillip Swagel, director of the Congressional Budget Office, tells the Big Take DC podcast. “ The situation is unsustainable.”
Swagel and Bloomberg reporter Liz McCormick join the Big Take DC to discuss the US government’s debt crisis, and what it would take to rein it in.Transcript:
Saleha Mohsin: The US government has a serious spending problem. It’s thrown money at military needs, roads, digging out of the pandemic—mostly using cash it doesn’t have in the bank. Just like the rest of us paying off a loan, the government has to pay interest on what it borrows. Over the past decade, those interest payments have crept up.They’ve become a bigger and bigger slice of federal spending—and soon, America will need to spend more each year paying off that debt interest than it spends on national defense. I’ve asked my sources at Treasury, in Congress, and even some historians – no one can think of us ever being here before. Everyone agrees we have a problem – but what no one can agree on is where the buck stops to fix it.
America’s debt is spiraling out of control – it’s over $34 trillion right now. And if it feels like every other month, Congress is narrowly avoiding a government shutdown over spending… that’s because it kind of is.
This week, we’ll look at how we got here, and what it will take for Washington to fix it. From Bloomberg’s Washington bureau, this is the Big Take DC podcast. I’m your host, Saleha Mohsin.
Mohsin: Borrowing money is not always a bad thing. In 1790, Alexander Hamilton wrote that debt was the price of liberty.
In Lin Manuel Miranda’s musical about Hamilton’s life, you can hear the young Treasury secretary pleading with the other founding fathers:
Hamilton: If we assume the debts, the union gets new line of credit, a financial diuretic. How do you not get it…
Mohsin: Without debt, he rap-argues, the US couldn’t fund the fight to become an independent nation.
Hamilton: We needed money and guns and half a chance, uhh who provided those funds?
Mohsin: So the US has really leaned into debt—so much so that the last time the country had zero debt was in 1835.
That’s because each year, the US creates a massive budget. It’s money that keeps the economy moving, even when faced with challenges like a once-in-a-lifetime pandemic.But when the federal government wants to spend more than it’s bringing in through taxes and other revenue, it has to borrow—from other countries and the private sector. That gap between our money in and our money out is called a deficit.
Liz McCormick: You could think about it for your household. If everything I owe is bigger than the assets I have, I’m in a deficit.
Mohsin: My colleague Liz McCormick and I have spent a lot of time talking about the deficit. She’s a chief correspondent at Bloomberg, covering debt and currency markets.
McCormick: So for the US, all the net revenues they’re taking in after they pay out all their expenses, they’re in the red.
Mohsin: Unlike a household spending more than it’s bringing in, it’s ok for the US government to live its life in the red.
McCormick: We have the global, what they call reserve currency, meaning many things are priced in US dollars. It gives us this kind of special status. No one quite thinks the US is going to kind of really default on their debt. (laughs)
Mohsin: In other words, people trust that the US will pay back its loans eventually—and they trust so deeply that it’s good for its dollar that they rely on it as the backbone of the global economy. That’s one reason why America can run up such a high bill. But lenders still want something in exchange for buying US debt.
McCormick: There’s no free lunch. So they’re saying, ‘yeah, here, US Treasury, take our money. We like you, take it. But give me something every month because I’m kind of putting my money to you and I can’t use it, right? So, at least give me some, what we call, interest.’
Mohsin: So when the government wants to fund a program—say, a new part for Medicare, building a bridge, or helping allies like Israel or Ukraine—even if we don’t have that money set aside, we can borrow it at a very low cost to taxpayers.
That’s helped us get out of some really sticky situations. You may recall what newscasters and headlines sounded like during the financial crisis…
CBS Archival: Three of the five biggest independent firms on Wall Street have now disappeared.
AP Archival: Wary investors now wonder how the markets will recover from billions of dollars of bad mortgage debts, frozen credit markets, banks afraid to lend…
George W. Bush Archival: We are in the midst of a serious financial crisis…
Mohsin: That last clip was President George W. Bush speaking in 2008, when the government used spending to prop up a flailing economy. But that came with a price tag of hundreds of billions of dollars. The federal deficit nearly tripled from what it had been before the crisis.
Barack Obama Archival: Now, every family knows that a little credit card debt is manageable.
Mohsin: That’s President Barack Obama, speaking in 2011.
Barack Obama Archival: But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money… [fade]
Mohsin: In 2013, US debt surpassed the country’s GDP.
When President Donald Trump took office, he worked with Congress to cut taxes as a way to help grow the economy. Those tax cuts will add an estimated two and a half trillion dollars to the nation’s deficit in the next decade or so.
And then… Covid hit. And lawmakers were desperate to keep the economy afloat.
CNN Archival: First: those stimulus checks. Up to $1,400 for about 90% of households—
C-SPAN Archival: We’re making sure that small businesses have access to loans for their fixed costs—
C-SPAN Archival: And expanded unemployment insurance.
McCormick: During the pandemic, even as our borrowing shot up, as it kind of should in a crisis, we, we didn’t want, you know, companies and people to personally fail and not be able to fund their life. So there was a lot of fiscal support. Uh, but the Fed was cutting rates down to zero.
Mohsin: Let’s recap: to keep the economy from cratering, the government spent and then the Federal Reserve said: let’s make it really easy for people to borrow even more so that they keep spending. So the Fed slashed interest rates – making it cheaper to take on debt.
McCormick: But that’s all been turned on its head now because, because of inflation, the Fed has had to lift rates to like a 22 year high.
Mohsin: That 22-year high is a shock to the economy right now. People and companies have gotten so used to low interest rates, that now, everyone’s adjusting to how much more they have to pay—for everything from car loans to mortgages.
And higher rates are hurting the government’s wallet, too.
McCormick: And that’s made the Treasury, every time they pay interest semi-annually, pay a lot higher interest. I mean, our interest expense is almost the amount of what we’re paying for big other categories like defense.
Mohsin: In 2023, the cost of just paying off the interest on US debt… reached $1 trillion. Coming up… as the US debt continues to climb, what is the growing cost to taxpayers?
Mohsin: The US debt has been climbing for decades. But to understand why experts think now is different, I wanted to talk to someone who’s seen how the budget is handled – from the inside.
So I sat down with Phillip Swagel. He’s the director of the Congressional Budget Office, or CBO. It’s a non-partisan agency, funded by Congress.
Phillip Swagel: We provide the Congress with budget analysis and economic analysis. We would never say to a member of Congress, your bill is the, the right thing or the wrong thing, we just provide analysis.
Mohsin: If you’re following news coverage of a proposed law, you’ve probably heard CBO’s estimate for how much that legislation will affect the national debt.
American Farm Bureau Archival: The Congressional Budget Office released their ten-year baseline for farm bill spending…
PBS Archival: The Congressional Budget Office estimates these changes could cost more than $90 billion over the next two years.
Mohsin: Swagel told me that there are two main reasons we should care that the government can’t get its debt under control.
First, it means that we have to spend money paying off interest – as in, managing the debt load – instead of using that money for programs that actually help people. And second, it’s only going to get worse.
Swagel: When we have higher interest rates, more debt. We pay more in interest. And then that builds back into the debt which leads to yet, higher debt and higher interest payments.
Mohsin: So, it’s a spiral.
Swagel: We are in a spiral now. It’s a slow spiral, but it’s still a spiral of rising debt and rising payments on the debt. The situation is unsustainable.
Mohsin: Just this week, Nassim Nicholas Taleb, a former options trader who wrote a book about unpredictable events called The Black Swan, told a hedge fund he advises that “a debt spiral is like a death spiral.”He’s not the only one with eyes on the economy who’s been raising alarm bells. A few weeks ago, Robert Rubin, the former Treasury Secretary, put it bluntly on Bloomberg TV:
BTV-Wall Street Week Archival: No, I think we’re in a terrible place.
Mohsin: And this is all while the US has some of the cheapest interest rates of any country in the world. That’s because America has a solid record of paying back its loans, other countries cut a sweet deal when they loan money. But that could all change.
If the US keeps borrowing from other countries, and racking up a high bill—and continues to squabble over paying its debt… the country, and the US dollar, could lose its favored status.
It’s not enough to avoid a default—just the fighting is hurting the country. It’s like when parents fight and threaten to divorce, but don’t. Just because they stay together, doesn’t mean the fights don’t cause damage.
Our only hope for a way out of this debt spiral is for Congress to balance the budget. But that requires some hard decisions about where to cut spending. And Congress… is famously deadlocked.
McCormick: I don’t want to be too pessimistic, but I just don’t see the political will down in Washington right now to, to change their tune. We can’t seem to work across the aisle and get these agreements that would work to put us at least on a trajectory where the deficit should be getting better, right?
Mohsin: Even passing a basic spending bill has turned into a high-wire act, haunted by regular government shutdown threats. So getting through any serious cuts is gonna be hard.
Swagel: The challenge is that at any moment, we don’t have to take action, right?
Mohsin: So it’s hard to imagine folks in government suddenly getting inspired to take action. But there is at least one example of a time when it got its act together. Swagel says, back in the ‘90s, people thought the US might fully pay off its debt— and they were worried about that!
Swagel: And that’s because of the privileged place of Treasury securities. The Treasury debt has an important role in the global economy. A Treasury bond is an asset for the private sector that is seen as safe, and seen as liquid. And so if investors want an asset with those characteristics, the ability to buy and sell treasury bonds is important to financial markets.
Mohsin: That fiscal responsibility didn’t happen by accident. It essentially took investors bullying President Bill Clinton’s administration. Here’s how that went:
Investors were against the government’s unsustainable spending. So they revolted. They started dumping their Treasury bonds, and when those bonds flooded the market, they appeared a whole lot riskier. It was your basic laws of supply and demand at play.
When Treasuries are seen as even a tiny bit riskier, buyers demand a higher return on their investment. Kinda like how your home insurance costs more if you live in a flood zone.
So to recap: investors sold off Treasuries, which drove prices lower. But that drove up the amount buyers demanded in exchange for each bond. That made it more expensive for the government to borrow.
And Treasuries guide the interest rate for all sorts of debt—like home mortgages and other consumer obligations. So all of a sudden, you’ve got the makings of an economic slowdown, which is every elected leader’s nightmare.
McCormick: Back in the Clinton days, you know, James Carville, his advisor always joked like, ‘I thought I’d wanna come back as,’ what did he say? ‘Like a great baseball player or the Pope or something.’ And then he is like, ‘I wanna come back as the bond market,’ because Clinton wanted to do all the spending and bond yields just went crazy.
Mohsin: Clinton was forced to change his whole economic agenda just to keep investors happy – and prevent an economic crisis.
Back in the ‘90s, debt interest wasn’t skyrocketing like it is today, so it’s a bit of an apples to walnuts comparison. But it’s possible that the same kind of pressure from markets could help now.
McCormick: Maybe if bond yields just keep going and going and this situation gets worse and worse, maybe somebody gets religion and says we need to do something, but I think it’s going to take a lot.
Mohsin: Thanks for listening to the Big Take DC podcast from Bloomberg News.
I’m Saleha Mohsin. This episode was produced by Julia Press and Naomi Shavin. It was fact-checked by Stacey René. Alex Sugiura and Blake Maples are our mix engineers. Our story editors are Caitlin Kenney, Wendy Benjaminson, and Michael Shepard. Nicole Beemsterboer is our Executive Producer. Sage Bauman is our Head of Podcasts.
If you liked what you heard, please be sure to subscribe, rate, and review the show—it’ll help other listeners find us! Thanks for tuning in. I’ll be back next week.
On each episode of the Big Take DC, host Saleha Mohsin explores one story about how money, politics and power shape Washington—and the consequences for Americans and people all over the world. Download and subscribe to the Big Take DC podcast on iHeart, Apple, Spotify, Bloomberg Carplay or wherever you listen.
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