(Market Watch) - A rally is underway for stocks after the long holiday weekend, thanks to another tariff reversal from President Trump.
And bond yields continue to ease. That’s a sore point for Deutsche Bank, where strategist Henry Allen points out the 10-year Treasury yield at around 4.5% is at a level seen before the global financial crisis “even though U.S. public debt is more than double what it was then.”
On that note, our call of the day from Peter Orszag, President Barack Obama’s former budget director, warned of “alarmingly elevated” U.S. fiscal risks, in an op-ed for The New York Times.
Now the chief executive and chairman of Lazard LAZ, Orszag admits he tuned out the worrywarts for years. “With very low interest rates, a lack of particularly attractive alternatives to serial Capitol Hill dramas over raising the debt limit, those who bemoaned the unsustainability of deficit spending and debt levels seemed to cry wolf — a lot,” wrote Orszag.
“Two things have changed: First, the wolf is now lurking much closer to our door,” he said, noting that annual federal budget deficits are running at 6% of gross domestic product or higher, versus “well under 3% a decade ago.” Interest rates on 10-year Treasurys have more than doubled to around 4.5%, with the government set to pay more on interest-rate payments than “big essential budget items.”
Second, publicly held federal debt excluding Federal Reserve holdings, as a share of GDP, is up by a third since 2015, and that is forecast to just keep climbing.
“All of this is occurring against a backdrop of an even more polarized political system, increased tension with foreign debtholders and less confidence in American security protections that promoted the dollar as the world’s safe haven,” said Orszag.
Some argue that no modern economy such as the U.S., with its freely floating exchange rate and debt denominated in its own currency, has ever defaulted on its debt. Weakening that is the fact America’s fiscal position is completely unique.
With around a third of debt foreign owned — $9 trillion — the U.S. is heavily dependent on foreigners to keep its global reserve dollar status. If that wobbles, higher interest rates and stress on the fiscal position could result. Also, he said, Treasurys in the future could face competition from another country’s more attractive debt.
Orszag offered solutions to the deficit problem, the first that the U.S. champions its world-reserve currency status and that great privilege. The second is to eliminate the debt limit, which “only creates unnecessary distractions,” and then lock in long-term rates by extending maturities on some Treasury debt.
“The basic idea is to borrow over 30-year periods or even longer, rather than borrowing over a short period and then having to refinance every few years,” he said. The U.S. economy should also aim for higher growth, though it’s tough to enact policy changes to help that, he said.
What else needs to be done, though probably won’t, is “generate fiscal savings in our large entitlement programs and raise revenue.” He suggested changes could be made to use AI in healthcare and doctor decision-making and an aggressive push to pay for quality over quantity.
While the current budget legislation moving through Congress will only make things worse, getting the budget deficit down, should be priority one, he said.
By Barbara Kollmeyer
