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Interest Payments on US Debt…

Almost the amount spent on defense.

This year, investors are becoming concerned about the US’s massive debt load. Over the next five years, the government will probably spend more on interest payments than on defense. The investment manager believes that the growing debt load will eventually reduce the demand for Treasury bonds.

According to Capital Group, the government may soon be spending more on interest payments than on defense as a result of the US’s mounting debt, which is increasing daily.

In a research paper from October, US asset manager economist Darrell Spence stated, “US debt dynamics are evolving in a way that requires attention.” “Over the next five years, net interest payments on the debt are expected to surpass defense spending.”

Spence went on to say that the government’s spending on net interest payments might jump from less than $500 billion to an astounding $1.4 trillion by 2033 if the debt load of the largest economy in the world increases at the rate predicted by the Congressional Budget Office.

Policymakers may be concerned about the possibility that interest payments would soon exceed defense spending, given that President Joe Biden promised on Monday to ask Congress for more than $100 billion in funding to defend Israel and Ukraine.

With legislators striking an 11th-hour agreement to raise the government borrowing limit back in May 2023 and Treasury bonds seeing one of the biggest sell-offs in market history, debt has been a key concern for Wall Street this year.

On September 18, the US government’s liabilities surpassed an astounding $33 trillion; one month later, the amount had increased to $33.64 trillion, meaning a growth of $20 billion on average every day.

According to Spence, American borrowing may be getting close to a point where it could lead to financial hardship. If a nation “had interest rates that were higher than its economic growth rate, the incremental revenue generated by the economy each year became smaller than the interest payments on the debt, and the debt began to grow all by itself,” then that nation’s debt levels would normally be a problem, he stated.

“The United States had fallen well short of that mark. Thus far,” he continued.

Spence issued a warning, pointing out that the mounting debt load would compel tax increases from the government, encourage additional bond sell-offs, and push the Federal Reserve to hike interest rates.

“Slower economic growth also could be expected, given that government spending would need to be re-routed to debt service,” he stated. “For investors, this could lead to lower stock market returns over time, given the strong long-term correlation between GDP growth and market returns.”

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