Bottom Line: If the debt ceiling doesn’t get raised and rates don’t get cut dramatically by August of 2025, the US economy will suffer bigly.
It turns out $11 trillion dollars in loans come due in the next twelve months for Uncle Sam. Of the $36 trillion of national debt almost a third will come due.
Keep in mind when you buy a treasury bond, you are lending Uncle Sam money. At the end of the loan he has to pay you back your principal. Unfortunately, he doesn’t the money, so he’ll simply borrow it from treasury bond buyers a the current interest rate. That interest rate is the bond yield if you are buying the bond.
If that were all to happen today, the interest expense would be $1.5 trillion dollars by 2026.. That’s the most we, the taxpayer, spend on any budget item. More than defense or Medicare or Social Security. We don’t have the approval (budget) to borrow that much to pay the interest on what we borrow.
The likely scenario would be a crisis in confidence in the Treasury market. Bond investors would doubt the seriousness that the government has to get it’s affairs in order. Bond vigilantes would require even higher interest since the risk is greater. The banks would then need higher interest for your mortgage and car note. The economy would grind to a halt. The stock market would not be happy. Remember 2008? Same, but worse.
Two things need to happen.
First, Congress must raise the debt ceiling. This refinancing and the interest expense would increase expenditures beyond our current budget. That means Congress would have to raise the debt ceiling. We have to borrow money to refinance and to service the debt we are refinancing. It’s a doom loop. Initially, this was to be addressed in June of 2025 but they’ve pushed it back to August of 2025.
Second, the Federal Reserve needs to cut rates by 1 percent or more. If not, we simply can't afford to pay the interest. Can the Federal Reserve cut rates? Inflation is steady at 2%, employment is within the target range. However, Jerome Powell (the dinner guest pictured above) didn’t cut rates in June and July is looking unlikely. Some say he’s playing politics, but his position is that tariffs require steady rates for now. This is turning into a real nail biter. The key takeaway is that the US Government is beholden to the Federal Reserve and not the other way around.
I share all this for two reasons. First, is so that you can sound sophisticated at dinner parties as you relay this information to your friends. Second, is so that you can go to dinner parties and rest assured that these big problems are factored into your financial plan and your customized investment portfolio. Would you like more guidance on how to bedazzle and amaze your dinner guests, let's schedule a call.