The Federal debt is undoubtedly on an unsustainable path. The debt burden is already close to 100% of GDP and, with the budget deficit likely to remain close to 6% of GDP for the foreseeable future, it would hit 120% of GDP within the next decade. Concerns about ballooning supply have driven up the term premium component of Treasury yields further this year and there is a risk of a vicious cycle developing – with fears about the long-term sustainability of the Federal debt raising borrowing costs, which add to the deficit and make the debt path even more unsustainable. Since it has ultimate control over printing its own currency, the Federal government can never go bankrupt. But the resulting inflation (if the central bank is forced to print money to pay the government’s bills) and the crowding out of private investment and consumption (if long-term interest rates rise) would still have a negative impact on broader economic performance.
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