Swelling US debt could tip US markets into crisis as soon as next year

Swelling US debt could tip US markets into crisis as soon as next year.

Congress must act swiftly to curb the rapid growth of US debt, or 2025 could see market turbulence similar to the UK's 2022 financial crisis. Wharton professor Joao Gomes cautioned that failing to adjust the fiscal trajectory could lead to a scenario where markets deem the US fiscal path unsustainable.

Gomes highlighted the UK's experience, where a stimulus-heavy budget proposal led to soaring domestic yields, surging mortgage rates, and a historic low for the pound. He warned CNBC, "That's something that could definitely happen to us next year."

The US has already faced a taste of potential turmoil, with Treasury bond yields hitting 5% in November 2023 due to mounting debt and an oversupply of Treasury bonds. Today, US debt stands at $34 trillion, an all-time high driven by extensive spending and rapidly rising debt-servicing costs.

Bank of America estimates indicate that the US is adding $1 trillion to its debt every 100 days. In an environment of higher interest rates, there's a real risk that the US could face a default crisis within this century.

Last year, a Penn Wharton Budget Model study suggested the country has 20 years to address the issue before tax hikes or spending cuts become ineffective. Gomes anticipates that the 2017 tax cuts, set to expire next year unless Congress extends them, will be a major point of debate. The tax cuts, implemented under the Trump Administration, reduced tax burdens on corporations.

"I think we'll have a serious debate next year about the tax cuts and whether to extend them or not," Gomes remarked. "And I think we just can't afford them."

The fate of this program largely hinges on the outcome of the November presidential election. However, neither candidate has outlined specific plans to tackle the fiscal issue.

Maya MacGuineas, president of the Responsible Federal Budget, emphasized that the solution would require both tax increases and spending cuts across the income spectrum. "There are many sensible plans out there," she told Business Insider last year, "We don't have the political will."