The Warning Signs Are Flashing Red on US Debt

Markets are screaming for cuts to the deficit, but Biden is determined to spend – and his Republican rivals are no better

Bond markets are screaming for a return to deficit reduction politics. Unfortunately, most policymakers are failing to listen to what the markets are telling them.

The U.S. 10-year Treasury yield surged above 4.8 per cent last week, the highest level since 2007, and a very sharp rise from the 2020 lows of about 0.6 percent. There is a time and a place for expansionary fiscal policy, such as the long recovery from the 2008 financial crisis or the COVID-19 pandemic, but market interest rates are a strong signal in working out what policy you should be using. And right now, amid a resurgence of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and high interest rates, it’s time to give the fiscal hawks their due.

A simple model of interest rates is that the balance of power has shifted between lenders and borrowers. And indeed, it has: many advanced economies borrowed heavily to protect their citizens from the twin shocks of the COVID-19 pandemic and the war in Ukraine. In the U.S., the deficit rose from 4.7 per cent of GDP in 2019 to 14.9 per cent in 2020. It still hasn’t recovered to normal levels.