FT: US faces “Lis Truss”-style market shock on soaring US debt

The US faces a Liz Truss-style market shock if the government ignores the country’s ballooning federal debt, the head of Congress’s independent fiscal watchdog has warned, speaking to the Financial Times. Phillip Swagel, director of the Congressional Budget Office (CBO), said the mounting US fiscal burden was on an “unprecedented” trajectory, risking a crisis of the kind that sparked a run on the pound and the collapse of Truss’s government in the UK in 2022.

The US was “not there yet”, he said, but as higher interest rates raise the cost of paying its creditors to $1 trillion in 2026, bond markets could “snap back”. According to the CBO, the US’s federal debt pile amounted to $26.2 trillion or 97% of gross domestic product, at the end of last year.

Swagel’s remarks to the FT came a day after the independent watchdog issued new longer-term economic projections, which showed debt levels rising to 166% of GDP in 2054, with debt-to-GDP levels surpassing their second world war high of 116% in 2029 — a trajectory Swagel described as “unprecedented”.

“The debt that was run up during World War II was largely paid back within the generation of the people who fought the war,” Swagel said, adding that the world’s reserve currency would not always insulate the US from market pressures as debt interest payments increased.

“We need to borrow from foreigners, because foreign capital helps keep interest rates low in the US,” Swagel said. “But there’s two sides to it, in that the cash flowing overseas means us losing national income. On the other hand, not having the capital coming in for us to borrow — boy, that would be even worse.”

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