A drastic solution to exploding US government debt

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Ethan Wu (0:36)

Thank Pushkin.

The US government has a big $1 trillion line item this year. But it's not for food stamps, it's not for Medicare, it's not for the military, it's for interest payments. Big debt, big deficits and rising interest rates are putting pressure on the US government's finances. Today on the show, why people are talking about the US busting out a radical wartime policy to deal with the debt. This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I am reporter Ethan Wu, joined here today in the New York studio by US markets editor Jenn Hughes, who recently went to a conference that I think can only fairly be described as the last safe space on earth for men wearing bow ties.

Jenn Hughes (1:27)

Hi there, Ethan. And I might not disagree with that.

Ethan Wu (1:32)

You were just at a conference hosted by Jim Grant of the legendary Grant's Interest Rate Observer, which for people that don't know, it's like reading a high-brow literary magazine, but like in finance.

Jenn Hughes (1:43)

Yeah, the New Yorker for Finance, I call it. So I went there recently and Jim Grant is famous for his bow tie, for being bearish. His cartoon in the magazine is actually a bear with a bow tie.

And there were many, many, many other bears in the room who all worry about the same things, slowing US growth, rising US deficits, the debt problem as they see it in the US. You come out of that after a day and you're quite scared about the economic outlook. Let's put it that way.

Ethan Wu (2:15)

Yeah, yeah, yeah. Did you come back feeling rattled by all the pessimism?

Jenn Hughes (2:19)

Well, it was the other day. In fact, a few weeks back. So I've recovered now. Your optimism has helped me.

Ethan Wu (2:25)

Okay, I do my best. I do my best.

And you've written about this conference and some of the ideas that you gleaned from it in today's Unhedged newsletter, which was very good. I think we want to get to some of those ideas. But maybe we should take a second and just back up to why people are worried about the debt and US fiscal policy and the deficit and so forth.

And I think a couple of things have changed, right? One is that the politics, I think, have started to look a little worse. Once upon a time, and maybe this is just a fairy tale, but it used to be Democrats were the spending party and Republicans were the fiscal conservatism party.

That may or may not have been true, but Donald Trump's presidency really, I think, put an end to that notion because he passed a big trillion dollar plus deficit increasing tax cut. And so now you have kind of a situation where both political parties are inclined to add to the deficit. That's one issue. A second issue is that interest rates, as we talk about on pretty much every episode of Unhedged, have gone up a lot, and that really matters for debt and deficits because you want to have, ideally, interest rates lower than your growth rate. That means your capacity to pay back debt grows faster than the debt itself. If those start to become closer or if potentially interest rates even exceed your growth rate, then you're in a little bit more trouble. You're in a situation where the debt could grow faster than your ability to repay it. And I think those two things changing have given a lot of investors anxiety about where's this really going to end.

Jenn Hughes (3:53)

Absolutely. And this is what this conference was talking about a lot. The idea that spending is unlikely to come under control in the next year or so. We've got election.

Politicians campaigning and running for office don't usually talk about cutting spending or raising taxes. So you're going to have a growing deficit. It's certainly not going to get cut.

Ethan Wu (4:15)

So at Jim Grant's conference, I mean, what sorts of scenarios are we really talking about that would get them so scared about the debt and deficits? Like, what do they have in mind that could go wrong here?