Zandi said he thought it was unavoidable that the U.S. could address its deteriorating finances without an external shock to force it. Over the past month, a sell-off in bond markets has pushed yields on the critical 30-year treasury bond sharply upwards, pushing the Treasury Department to buy back more of its bonds, starting early September, in an effort to artificially suppress interest rates.
“I think it’s almost inevitable that we’re going to see an event like this because I don’t think the American political system and people can make the changes that are necessary to address our long-term fiscal problems without being pushed by something like a crisis generated by higher interest rates,” Zandi said on the podcast.
‘We got a problem’
Zandi argued that he has never seen unnerving circumstances converge like this all at once. “Never in the 35 years has there ever been a time when all of the measures are screaming, you know, we got a problem,” he said.
The Moody’s economist first pointed to America’s debt-to-GDP ratio, which crossed the 100% threshold at the end of April. That gauge is typically used to demonstrate the amount of the debt held by the U.S. government against the size of the U.S. economy. It also provides insight into the federal government’s ability to repay it over time. The U.S. hasn’t reached triple-digit territory in debt-to-GDP ratio since the aftermath of World War II, when it once stood at 106%.
“If you look at our deficits, what we’re taking in right now and spending out, it’s massive,” Zandi said, referring to the government’s $2 trillion annual budget deficit. That sum becomes harder to pay down if interest rates climb, which is the current situation in part due to investors dumping their treasury bonds to fortify their financial portfolios against risks from the Iran War and the U.S.’s growing debt.
The cumulative national debt barreled past $40 trillion for the first time last week and there’s little sign it will stop snowballing anytime soon.
“We’re issuing a lot of debt. The fiscal situation is eroding,” Zandi said. “You mix that in with the increasing skepticism of global investors and investing in the United States because of what policies have been put in place over the last couple of years, and I think that’s the recipe for much higher interest rates.”
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The latest bond market unrest
The yield on 30-year treasury bonds stood at 5.17% on August 25, near multi-year highs. It topped out at 5.3% earlier this month, the highest level since 2007.
